Marketing - Marketing Management and Strategy 4th Edition PDF

0273693980_COVER 30/11/05 5:10 pm Page 1
Marketing Management and Strategy

“Peter Doyle has been an inspiration to marketing managers, researchers and educators for generations.
This book is not a routine discourse on marketing and strategy but a refreshing, insightful and original
guide to winning in markets.”
John Saunders, Professor of Marketing, Head of Aston Business School and Pro-Vice Chancellor of
Aston University
“I strongly recommend this book to all who consider themselves to be serious marketing professionals.”
Ann Murray-Chatterton, Director of Training and Development, Institute of Practitioners in Advertising
Peter Doyle
Marketing Management and Strategy, fourth edition,
is a concise, practical management guide to the New to this edition Phillip Stern
latest ideas in marketing and strategy for MBA
New international case examples throughout the
and executive courses. Adopted by many leading
book including Hewlett Packard, Mars, First Direct,
business schools, the book focuses on key issues
Microsoft, Fronterra, Pfizer, NEXT and Intel.
relevant to modern business, drawing on the
authors’ experience as consultants to many major Expanded contributions on Segmentation and
international companies. Positioning (Chapter 3), Market Dynamics and
Competitive Strategy (Chapter 5) and Building
With its interdisciplinary approach, this book gives Successful Brands (Chapter 6).
practical, step-by-step guides to developing a
marketing strategy, making pricing decisions and
developing advertising and communications plans.
New section on Corporate Social Responsibility
(Chapter 12).
Marketing
“This is a text which both MBA students and marketing managers will find of real value. It applies relevant
theory to important practical issues.”
Fred Feinberg, Bank One Corporation Chair, Ross School of Business, University of Michigan
Management
and Strategy
“I enjoyed Peter Doyle's teaching and have the highest regard for this book. I am very pleased to see the
continuation of his work with the new edition.”
fourth
Tim Mason, Marketing Director, Tesco PLC
edition
Doyle and Stern

Peter Doyle (1943-2003), MBA, PhD, was Professor of Marketing and Strategic Management at the University of Warwick,
where he headed both the executive and MBA programmes. He was one of the world’s leading academics and consulted
for many top international companies including Coca-Cola, Mars, Tesco, IBM, Nestle, British Airways, British Telecom,
Unilever, Shell, Hewlett-Packard. He also wrote a regular column on business matters for the Guardian newspaper.
Philip Stern is Senior Lecturer in Marketing and Strategic Management at Warwick Business School and Academic Director
of the Executive MBA programme. His research is focused on market segmentation, the pharmaceutical industry and the
prescribing behaviour of general practitioners. His publications include articles in Journal of Brand Management, Journal of
Marketing Education, and International Journal of Medical Marketing. His consultancy clients include Procter and Gamble, Napp fourth edition
Pharmaceuticals, Novartis, IMS, GfK, GSK, Lilly Industries, Midlands Electricity, Abbey, MFI,
Premier Farnell, IMI and the National Audit Office.
Additional instructor
and student support at www.pearson-books.com
An imprint of www.pearsoned.co.uk/doyle
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MARKETING MANAGEMENT
AND STRATEGY
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9736 MMST_A01.QXD 12/5/05 3:01 PM Page iii
Fourth Edition
MARKETING MANAGEMENT
AND STRATEGY
Peter Doyle and Philip Stern

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Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies throughout the world
Visit us on the World Wide Web at:

www.pearsoned.co.uk
First published under the Prentice Hall imprint 1994

Second edition 1998
Third edition 2002
Fourth edition 2006
© Pearson Education Limited 1998, 2002, 2006
The rights of Peter Doyle and Philip Stern to be identified as authors of this work have been
asserted by the authors in accordance with the Copyright, Designs, and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical, photocopying,
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Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP.
All trademarks used herein are the property of their respective owners. The use of any
trademark in this text does not vest in the author or publisher any trademark ownership
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with or endorsement of this book by such owners.
ISBN-13: 978-0-273-69398-7
ISBN-10: 0-273-69398-0
British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data

Doyle, Peter, 1943 June 23-2003.
Marketing management and strategy / Peter Doyle and Phil Stern.-- 4th ed.
p. cm.
Includes bibliographical references and index.
ISBN 0-273-69398-0 pbk
1. Marketing. 2. Marketing–Management. I. Stern, Phil, 1954- II. Title.
HF5415.D753 2006
658.8--dc22
2005052643
10 9 8 7 6 5 4 3 2 1
10 09 08 07 06
Typeset in 9/13pt Stone Serif by 30.

Printed and bound by Mateau Cromo Artes Graficas, Madrid, Spain.
The publisher’s policy is to use paper manufactured from sustainable forests.

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Contents
Preface vii Summary 91

About the authors xi Questions 91
Acknowledgements xii Notes 92
Chapter 1 Chapter 4
MANAGEMENT: OBJECTIVES AND TASKS 1 STRATEGIC MARKET PLANNING 93
Objectives and success 2 Adapting to change 94
Stakeholders’ objectives and constraints 10 Evolution of planning systems 98
Developing balanced objectives 14 Corporate strategy 101
Developing a strategy 17 Business unit strategy 117
Criteria for strategic success 20 Summary 127
Strategic intent 22 Questions 128
Core competences 23 Notes 128
Organisational dimensions 25
Summary 28 Chapter 5
Questions 28 MARKET DYNAMICS AND COMPETITIVE
Notes 29 STRATEGY 131
Cycles of confusion 132
Chapter 2 Market dynamics 137
THE CUSTOMER-LED BUSINESS 31 The evolution of markets 140
The theory of marketing 32 Formulating marketing strategies 149
The customer-led business 37 Niche companies 158
Success 40 Summary 160
Focus on needs 42 Questions 160
Organisation 45 Notes 161
Competitive advantage 47
Entire business 48 Chapter 6
Customers as assets 49 BUILDING SUCCESSFUL BRANDS 163
Creating the customer-led business 52 Products and brands 164
Summary 60 Added values 166
Questions 60 How to build brands 172
Notes 60 The benefits of brands 177
Multibranding, line and brand extensions 180
Chapter 3 Revitalisation, repositioning and rationalisation 183
SEGMENTATION, POSITIONING AND THE Regional and global brands 186
MARKETING MIX 63 Buying versus building brands 188
Market segmentation 64 Valuing brands 190
Dynamic targeting strategies 74 The branding dilemma 190
Creating the differential advantage 78 Summary 192
Positioning strategy 84 Questions 192
The marketing plan 85 Notes 193
Market-centred organisations 89
v
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Contents
Chapter 7 Questions 318

INNOVATION AND NEW PRODUCT Notes 318
DEVELOPMENT 195
Chapter 11
Meaning of innovation 196
MANAGING MARKETING CHANNELS 319
Why innovate? 198
Strategic opportunities for fast innovators 202 The role of channels 321
Barriers to innovation 204 Designing distribution channels 324
Organising for innovation 206 Managing distribution channels 330
New product development process 210 Channel evolution 333
Customer adoption process 219 Organising distribution 337
Summary 223 Summary 345
Questions 223 Questions 345
Notes 223 Notes 346
Chapter 8 Chapter 12
PRICING POLICY: DELIVERING VALUE 225 MARKETING IN SERVICE BUSINESS 347
Nature of services 349
Assessing price competitiveness 227
Establishing initial prices 229 Service characteristics 351
Initiating price changes 238 Service tasks 355
Controlling reseller mark-ups 241 Services marketing strategy 361
Summary 245 Summary 376
Questions 245 Questions 377
Notes 246 Notes 377
Chapter 13
Chapter 9
TURNAROUND MANAGEMENT 379
COMMUNICATIONS STRATEGY 247
Short- versus long-term improvements 380
Introduction 248
Types of industry change 382
Communications and buyer behaviour 250
Some financial concepts 385
Advertising planning 259
Consolidation phase 388
Direct response marketing 272
Transformation programme 397
Interactive marketing 274
Summary 407
Sales promotion 275
Questions 408
Public relations 279
Notes 408
Determining the communications mix 281
Summary 284 Chapter 14
Questions 285 MARKETING IN THE FUTURE 409
Notes 286
Marketing: a recapitulation 410
Chapter 10 Changing marketing environment 413
MANAGING PERSONAL SELLING 287 Less significant than predicted? 417
More significant than predicted? 419
Salesforce objectives 288
Corporate social responsibility in action – TNT 422
Salesforce strategy 290
Summary 425
Structure and size 294
Questions 425
Allocation of resources 299
Notes 425
Sales management 301
The selling process 307 Further reading 427
Negotiations 312 Author index 435
Managing account relationships 316 Company index 437
Summary 317 Subject index 440
vi
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Preface
This book explores the role of marketing in the modern organisation. It presents an
up-to-date review of the most important concepts and techniques managers need to
analyse today’s markets and to capitalise on the opportunities that are continually
emerging. For most organisations, marketing is the single most important determi-
nant of success. This is obviously true of businesses operating in the dynamic,
globally competitive markets of today, where the ability to satisfy, or delight, cus-
tomers is the only determinant of their ability to generate revenues. But marketing is
increasingly recognised as central by managers in public sector and other, not-for-
profit organisations. After all, no organisation exists for its own sake, but rather its
task is to meet the needs of those ‘publics’ it was created to serve.
Confusion: marketing vs. selling

Many managers still confuse marketing with selling. To them, the word ‘marketing’
conjures images of the striking advertisements that they see on television, the latest
in-store promotional gimmick, or the figure of the slick, smooth-talking salesman.
But such images have little to do with the reality of developing successful marketing
strategies today. Real marketing is the philosophy of management which recognises
that the success of the enterprise is sustainable only if it can organise to meet the cur-
rent and prospective needs of customers more effectively than competition. Selling
and marketing are contrasting in their approaches. Selling tries to push the customer
to buy what the business has. Marketing, on the other hand, tries to get the organisa-
tion to develop and offer what the customer will find of real value. This way
marketing seeks to build long-term, mutually beneficial partnerships between the
organisation and its customers.
Increasing importance
In the twenty-first century, marketing is becoming even more important. Gone are
the stable markets of yesteryear. Today’s markets are fickle, fast moving and continu-
ally splintering as customers’ wants change, technology advances and competitors
find new ways of adding value and creating additional satisfactions for consumers.
Organisations that do not focus on these continually changing markets are quickly
beached by the stream of new products, new services and new positioning strategies
offered by their more alert competitors. No organisations are sheltered. Companies
such as Marks & Spencer, General Motors, ICI, Xerox, and Philips, that, not so long
ago, were regarded as icons by managers in other firms, now struggle for their very
survival. Hundreds of unsung, but often long-established companies disappear
every year.
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Preface
Aims of this book

Marketing – the close analysis of customers and the search for new ways of adding
value – offers the only opportunity for managers to keep their heads above these tur-
bulent waters. In the chapters that follow, we look at how this should be done. We
show how to develop a marketing orientation in the organisation and how this
impacts on the ultimate corporate goals of profit, growth and security. Then we
examine how marketing strategies are developed and implemented through effective
product, pricing, distribution, communications and service policies.
Target audience
This book is geared toward men and women who hold, or expect to hold, senior
management posts in organisations. It is not written solely for marketing specialists.
Marketing is so central to the success of an organisation that it cannot be thought of
as primarily a specialist discipline. Knowledge and concern for marketing are key
responsibilities for all managers whatever their functional labels. The ultimate task of
every manager is to contribute to developing products and services that meet the
actual or potential needs of customers more effectively than competitors.
Two particular groups of readers were in mind when this book was planned. The first are
middle and senior business executives working for companies competing in inter-
national markets. The second are those studying for MBA programmes who, we hope,
will find the book a suitable text for their graduate marketing course. Teaching MBA and
executive courses around the world, we have found that the requirements of executives
and MBAs are no longer distinct and separate. All the top business schools now insist
that MBA candidates have substantial business experience (the average age is over 30).
Today’s MBA students demand pragmatic, executive-oriented teaching materials and are
not interested in impractical academic theorising. At the same time, there has been a dis-
tinct shift among executives towards management texts that treat more seriously the
complex and difficult issues of competing in a dynamic, international marketing envi-
ronment. Teaching a high-level executive programme today is very similar in content
and rigour to a good, graduate MBA class. The prime aim of this book is to provide a
practical guide to marketing decision making and to developing a marketing strategy.
The previous editions of this book have been used at many leading business schools for
their MBA programmes. These include the London Business School and the universities
of Aston, Brighton, Buckinghamshire, Cambridge, Derby, Galway, Humberside,
Liverpool, Luton, Newcastle, Norwich, North London, Oxford Brookes, Surrey, Teesside,
Warwick and University College Dublin. It has also been widely used on company exec-
utive programmes, including AstraZeneca, Burmah Castrol, Cadbury Schweppes, Coats
Viyella, Coca-Cola, KPMG, Novartis and Saatchi & Saatchi.
Book objectives
As a result, the books objectives are to:
■ Appeal to executives across all the functional areas of the business. Effective marketing
is fundamentally a multifunctional task. Today, all managers need to be drawn into
contributing ideas for increasing their organisation’s marketing competitiveness.
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Preface
■ Draw on multiple disciplines. Successful marketing requires managers to draw on

findings and techniques from a number of fields, including finance, accounting,
economics, information technology and organisational behaviour.
■ Reflect the key issues facing managers in today’s markets. The twenty-first century
brings new, additional priorities including responding to environmental pressures,
the focus on time-based competition, the importance of the expanding European
Union and other regional markets, shortening product lifecycles and the ever
increasing importance of innovation.
■ Present a global perspective. For today’s major companies, the internationalisation
of markets and competition impacts on every aspect of their strategies. Therefore,
unlike some books, this one does not have a special chapter on international mar-
keting; instead the international perspective is reflected throughout the work.
■ Provide an advanced treatment of marketing and strategy. The book is for current
or potential senior executives. It assumes familiarity with the operations of the
firm and the major institutions of the market. It focuses on those issues of most
concern to senior executives. It avoids purely descriptive material and the treat-
ment of lower-level management topics.
■ Offer a practical, pragmatic approach. The book seeks to provide a guide on how to
improve marketing performance. It includes concepts only when they provide
managers with real insights into how to approach these important decisions. It is
fairly ruthless in omitting abstract academic theorising in order to allow more
than usual scope for the detailed treatment of the most practical and relevant ideas
and techniques.
■ Provide an up-to-date review. The book incorporates recent thinking on markets,
strategy and related disciplines.
New to the Fourth Edition

The revision of this text started after the tragic and untimely death of Peter Doyle;
however, Peter provided a clear mandate, which included suggestions from adopters
and reviewers, as to how to proceed. In this fourth edition, the emphasis on branding
and financial aspects of marketing has been enhanced. The adaptations in the new
edition reflect changes in the external environment, new perspectives on professional
marketing and new insights from current academic work. Key new features of this
edition are:
■ The use of new international case examples throughout the book including
Hewlett Packard, Mars, First Direct, Microsoft, Fronterra, Pfizer, NEXT and Intel.
■ Expanded contributions on Segmentation and Positioning (Chapter 3), Market
Dynamics and Competitive Strategy (Chapter 5) and Building Successful Brands
(Chapter 6).
■ There is a completely new section on Corporate Social Responsibility (Chapter 12)
which is of increasing concern to many of today’s top executives.
■ The book is now presented in four colours using a new design to enhance readability.
ix
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Preface
Acknowledgements
Peter was always keen to acknowledge his research colleagues with whom he worked
closely: Marcel Corstjens, David Cook, Ian Fenwick, Zeki Gidengil, Graham Hooley, John
McGee, Paul Michell, John Saunders, Vivienne Shaw, Veronica Wong and Arch Woodside.
His approach to teaching and research was also influenced by other outstanding schol-
ars, including Professors Ken Simmonds at the London Business School, Venkataraman
Srinivasan at Stanford, Jean-Claude Larreche, Philippe Naert and David Weinstein at
INSEAD, Michael Baker at Strathclyde, Robin Wensley at Warwick, Susan Douglas at
New York University and the late Abe Schuchman at Columbia.
Much of this book reflects Peter’s consulting work over twenty years. In particular, the
book is influenced by the co-operation of managers from the following organisations:
American Home Products Electrolux Price Waterhouse

BMP DDB Needham Cap Gemini Rhone Poulenc
British Airways Hewlett-Packard Saatchi & Saatchi
British Telecom IBM Sandoz
British Steel (now Corus) ICI Sears
Burmah Castrol KPMG Shell
Cabinet Office 3M SKF
Cadbury Schweppes Marks & Spencer J. WaIter Thompson
Cargill Nestlé Unilever
Coats Viyella Novartis Volvo
Coca-Cola Ogilvy & Mather AstraZeneca
Dunhill Philips Zyma
Peter wanted the ideas in Marketing Management and Strategy to continue to develop.
This edition is the first step in that process.
As well as being greatly influenced by Peter, I have been very lucky to have worked
closely with many academics and marketers from whom I learned about research,
teaching and practice. I would particularly like to acknowledge the contributions of
Andrew Ehrenberg, Robin Wensley, Annik Hogg, Sally Dibb, Fred Feinberg, Kathy
Hammond, Cam Rungie, Gilles Laurent, Bill Boulding, Byron Sharp, Terry Hardy,
Allan Bowditch, Paul Jackson and Mark Horgan.
I would also like to thank Senior Acquisitions Editor Thomas Sigel and the rest of his
team for their encouragement and guidance on this edition.
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About the authors
Peter Doyle (1943–2003) was one of the most influential Professors of Marketing and
he shared his unique insights with his fellow academic researchers, companies bene-
fiting from his advice and several generations of MBA students who were captivated
by his incisive and irreproducible teaching style.
As well as helping to build the marketing faculty at Warwick Business School, Peter
held academic positions at the London Business School, INSEAD, Bradford and
Stanford Universities. He published some 200 works on marketing strategy and
brands. As well as this text, his books include Innovation in Marketing and Value-Based
Marketing: Marketing Strategy for Corporate Growth and Shareholder Value.
He consulted for many top international companies such as Coca-Cola, Mars, Tesco,
IBM, Nestlé, British Airways, British Telecom, Novartis, Diageo, Unilever, Shell,
Philips, AstraZeneca and Hewlett-Packard.
Peter published in most of the major international journals. His research was twice
awarded the Gold Medal from the Operational Research Society and the Best Paper Award
from the American Marketing Association and the European Marketing Academy.
Philip Stern is Senior Lecturer in Marketing and Strategic Management at Warwick

Business School and Academic Director of the Executive MBA programme. His
research is focused on Market Segmentation, the Pharmaceutical Industry and the
prescribing behaviour of General Practitioners. His publications include articles in
Marketing Letters, Long-Range Planning, OMEGA, Journal of Brand Management, Journal of
Marketing Education, British Journal of Management, International Journal of Medical
Marketing and Marketing and Research Today.
As well as contributing to the Warwick undergraduate MSc and MBA programmes, he
is actively involved with the Warwick Executive Short Course Programme.
His consultancy clients include Procter and Gamble, Napp Pharmaceuticals, Novartis,
IMS, GfK, GSK, Lilly Industries, Midlands Electricity, Abbey, MFI, Premier Farnell, IMI
and the National Audit Office.
xi
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Acknowledgements
We are grateful to the following for permission to reproduce copyright material:

Figure 1.9 from ‘The core competencies of the corporation’, in Harvard Business Review,
May–June, Harvard Business School Publishing Corporation (Prahalad, C.K. and Harnel, G.
1990); Figures 2.6 and 2.7 from The Loyalty Effect: The Hidden Forces Behind Growth, Profits
and Lasting Value, Harvard Business School Publishing Corporation (Reichheld, F.F. 1996);
Figure 4.14 from ‘The McKinsey seven-S framework’, from In Search of Excellence: Lessons
from America’s Best Run Companies, by Thomas J. Peters and Robert H. Waterman, Jr, copy-
right © 1982 by Thomas J. Peters and Robert H. Waterman, Jr, reprinted by permission of
HarperCollins Publishers; Figures 5.6 and 5.8 from ‘Marketing warfare in the 1980s’, in
Journal of Business Strategy, Winter (Kotler, P. and Singh, R. 1981), republished with permis-
sion, Emerald Group Publishing Limited; Table 10.2 from Getting to Yes: Negotiating
Agreement Without Giving In, 2nd edn, by Roger Fisher, William Ury and Bruce Patton,
copyright © 1981, 1991 by Roger Fisher and William Ury, reprinted by permission of
Houghton Mifflin Company, all rights reserved.; Table 7 © Booz. Allen Hamilton Inc.
(1982), New Product Management for the 1980s; Figure 11.9 adapted from Business Logistics
Management, 5th edn (Ballou, Ronald H. © 2004 p.110), adapted by permission of Pearson
Education Inc., Upper Saddle River, NJ; Figure 11.12 adapted from Marketing Management,
6th edn (Dalrymple, D.J. and Parsons, L.J., 2000), reprinted with permission of John Wiley
and Sons Inc.; Figure 12.1 from G. Lynn Shostack, ‘Breaking free from product marketing’,
in Journal of Marketing, April 1977, p. 77; Figure 12.2 from A. Parasuraman, V.A. Zeithami
and Leonard L. Berry, ‘A conceptual model of service quality and the implications for fur-
ther research’, in Journal of Marketing, Fall 1985, p. 48; Figure 12.4 from Managing Services
Marketing: Text and Reading, 2nd edn – HSIE 2nd edition by Bateson © 1992, reprinted with
permission of South-Western, a division of Thomson Learning: www.thomsonrights.com,
fax 800 730-2215; Figure 14.3 from ‘Classification of CSR Policies’ by C. Crook, © The
Economist Newspaper Limited, London (22–28 January 2005).
Harvard Business Review for ‘Putting Strategy into Shareholder Value Analysis’, by Day and
Fahey, published March–April 1990, ©1990 Harvard Business School Publishing Corporation;
Hagley Museum and Library for an adapted extract from Science and Corporate Strategy by Du
Pont and Hounshell published at http://www.cha4mot.com/p_jc_dph.html.; Telegraph
Group Limited for the article ‘Drug manufacturers’ role in NHS raises fears over ethics’, pub-
lished at http://www.telegraph.co.uk/health/main.jhtml filed on 29 September 2004;
Haymarket Marketing and Media Publications for ‘Howard and the Halifax’, by Robert
Campbell, published in Marketing Magazine, November 2004, ‘Ads must not only be memo-
rable but true to reality’, by Jane Bainbridge Marketing Magazine, December 2003 and
‘Marketing Mix: Halifax’s new marketing guru’, by Suzy Bashford, published in Marketing
Magazine November 2001; and The International Bank for Reconstruction and
Development/The World Bank for an extract from The World Development Report 1994:
Infrastructure for Development.
We are grateful to the Financial Times Limited for permission to reprint the following
material:
Table 1.1 ‘The world’s largest companies, 2004’, © Financial Times, 27 May 2004; Box 1.3
‘A star executive does not make a company’, © Financial Times, 15 February 2005; Box 11.2
‘A music sales storm is brewing in a coffee shop’, © Financial Times, 21 June 2005.
In some instances we have been unable to trace the owners of copyright material and we
would appreciate any information that would enable us to do so.
xii
9736 MMST_A01.QXD 12/5/05 3:01 PM Page xiii
Peter Doyle
wished to dedicate this edition to Sylvia, Ben and Hugo with his love.
Philip Stern
dedicates this book to Max, Sam and Imogen for the constant reminder of
what really matters.
9736 MMST_A01.QXD 12/5/05 3:01 PM Page xiv
9736 MMST_C01.QXD 12/5/05 2:44 PM Page 1
‘When the rate of change

inside a company is exceeded
by the rate of change outside,
the end is near.’
Jack Welch, Chairman of General Electric
Chapter 1 MANAGEMENT: OBJECTIVES AND TASKS
Today, rapidly changing technologies, the information revolution and global competition
are presenting new challenges to business. This book is about the role of marketing and
strategic management and how they contribute to the success of the firm in this new
environment. Marketing and strategic management are tools to enable the business to
achieve its objectives. This chapter considers the objectives of the firm and of the
managers who run it. The objectives of the firm are important because they govern the
values of the organisation, the direction it pursues, the capabilities it builds and the
measures it uses to evaluate performance and incentivise staff.
This chapter shows how managers tend to oversimplify when they set objectives for the
business. This has often led to unnecessary short-termism, reduced international
competitiveness and heightened vulnerability. Managers need to set a balanced array of
objectives covering more than just profitability and growth. Multiple objectives are
necessary because in the long run the firm has to satisfy multiple stakeholders. A central
task of management is to set goals that will satisfy the interests of all those parties on
whom the firm’s survival depends, including customers, shareholders, managers,
employees and the community.
The chapter explores three issues. First, it examines critically the most common
measures of business success used by managers. It shows how seeking ‘excellence’, or
outstanding performance, on one single measure such as profits or growth invariably
1
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Chapter 1 Management: objectives and tasks
produces major problems in other areas. Instead, alternative approaches that achieve
satisfactory performance across a balanced set of objectives are shown. Second, the
concept of strategy and the criteria to judge potential alternative strategic options are
explored. Finally, the firm’s long-run competitiveness depends upon management’s ability
to build core competences. The last sections of the chapter discuss the type of
organisation that has to be built if the business is to create these capabilities and
achieve international competitiveness.
Objectives and success
Companies use various criteria to judge the success of their business units and to
motivate their managers. Each of these objectives has some merit. It is only when
one is pursued to the exclusion of others that the limitations of these measures
become strikingly apparent. Unfortunately in recent years there has been a growing
tendency to stress unique measures of performance. One reason has been the increas-
ing popular interest in business. This has encouraged journalists and commentators
to seek to create league tables where companies are ranked, like football teams, in
order of performance. Such rankings require single, apparently objective measures
such as return on investment or economic value added. Managers now see them-
selves regularly and publicly rated in terms of ‘success’ against their competitors. A
second reason has been the increasing number of books and articles on ‘excellent’
companies. Notable examples have been Peters and Waterman’s In Search of
Excellence, Collins and Porras’ Built to Last and Hamel’s Leading the Revolution.1
Typically these writers choose one or two measures of ‘excellence’, such as profitabil-
ity or growth, identify the highest performers along these measures, and then exhort
other managers to follow the behaviour and practices of these companies.
The problem is, however, that it has become clear that the subsequent performance
of these so-called excellent companies has been dreadful. For example, of the 43 out-
standing US companies chosen by Peters and Waterman, only 14 were doing well five
years later and only 5 ten years on. In fact, many had disappeared altogether – hardly
a model of performance many managers would wish to emulate. Similarly, in the UK,
the top-selling management publication, Management Today, identifies each year the
country’s best companies. Of 12 top companies identified between 1980 and 1990,
only 5 survived to 1996! Of the five survivors only one could still be described as a
high performer.2
What this shows is that outstanding performance on one or two measures is a very
poor predictor of future success. As is explained below, the main reason is that each
measure is strongly associated with one stakeholder group. For example, increasing
shareholder value is beneficial for shareholders, but it can easily be inimical to man-
agers, employees and the local community. Similarly, rapid sales growth often
provides benefits for managers, but implies greater risk and reduced returns for owners
and creditors. The more management seek exceptional performance on one measure
of success, the greater these conflicts become and the more unstable the business.
2
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Profitability
In western companies, profitability is by far the most important objective that
senior managers are set (see Table 1.1). Sometimes they are set a target of an absolute
measure of profits; more often it is a ratio such as earnings per share, return on capi-
tal employed or return on shareholder funds. The targets are normally determined
on the basis of past performance and by comparison against other companies in
similar lines of business. Performance against these profit objectives is measured at
least annually and often quarterly or even weekly. Profitability is almost ubiquitous
as the primary measure of corporate and divisional success, and forms the basis for
the increasingly large bonus element in the compensation packages of senior execu-
tives. The main reason why profits or earnings rank so highly in UK and US
companies is that they are perceived as a key determinant of how the stock market
values a company. This point is made clearly by the head of one leading stockbroker
(see Box 1.1).
Table 1.1 The world’s largest companies, 2004

Global Global Company Country Market Sector Turnover Share Price/
rank rank value $bn price earnings
2004 2003 $bn $ Ratio
1 2 General Electric US 299 Diversified industrial 134 30 20

2 1 Microsoft US 272 Software & computer services 32 25 26
3 3 Exxon Mobil US 264 Oil & gas 237 40 12
4 5 Pfizer US 262 Pharmaceuticals & biotechnology 45 34 2
5 6 Citigroup US 259 Banks 86 50 14
6 4 Wal Mart Stores US 259 General retailers 256 60 28
7 11 AIG US 184 Insurance 99 70 20
8 15 Intel US 180 Information technology hardware 30 28 31
9 9 BP UK 175 Oil & gas 233 8 15
10 23 HSBC UK 164 Banks n/r 15 16
11 24 Cisco Systems US 162 Information technology hardware 19 24 45
12 13 Vodafone Group UK 159 Telecommunication services 55 2 15
13 8 Royal Dutch/Shell Neth/UK 159 Oil & gas 202 46 12
14 10 IBM US 157 Software & computer services 89 92 21
15 7 Johnson & Johnson US 149 Pharmaceuticals & biotechnology 42 50 21
16 21 Berkshire Hathaway US 140 Insurance/Investment n/r 91200 17
17 14 Procter & Gamble US 135 Personal care & household products 43 105 26
18 26 Toyota Motor Japan 129 Automobiles & parts 151 36 14
19 20 Coca Cola US 119 Beverages 21 49 27
20 18 Bank of America US 118 Banks 50 80 11
21 17 Novartis Swizt 116 Pharmaceuticals & biotechnology 25 43 21
22 16 GlaxoSmithKline UK 115 Pharmaceuticals & biotechnology 39 20 14
23 25 Total France 115 Oil & gas 127 178 19
24 39 Altria US 109 Tobacco 61 53 12
25 19 NTT Docomo Japan 103 Telecommunication services 45 2046 51
Source: Financial Times, 21 May 2004
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Box 1.1 The importance of profits

‘At 8.15 each weekday morning, the security salesmen and analysts at my firm meet to consider the ideas that
will be put to our 300 or so institutional customers during the day. Analysts give their recommendations for
specific shares: buy, hold or sell. It is these recommendations, together with similar conclusions recorded at
twenty or so other security houses, that collectively drive the share prices in the market. The single most
important figure affecting the analysts’ and hence the market’s view is forecast earnings per share.’
Source: I. H. Davison, Chairman of Alexanders Laing and Cruickshank
Despite the overwhelming popularity of measures of profit for judging business suc-
cess, these indices have striking and well-known flaws and biases. First, profits in
practice are easily and commonly manipulated by managers to produce misleading
results. Different, and perfectly legal, methods of accounting for depreciation, stock val-
uation, research and development, foreign currency translations and especially
different choices of accounting for acquisitions can change accounting losses into big
reported profits and vice versa. For example, AIG, the largest insurer in the world (see
Table 1.1) was revealed in early 2004 to have inflated its net worth by some 2 per cent
over a period of 14 years by using improper accounting and so overstating profits by
some $1.7 billion. Published profit figures can therefore be dubious indicators of per-
formance. Differences in legislation also create striking anomalies. For example, a
number of years ago SmithKline Beecham showed its profit as £130 million in the UK
but only £90 million in the USA. Carlton Communications showed its profits as $238
million in the UK, but according to the tighter US accounting rules they were only
$133 million.3 Such anomalies have become less common due to accounting standards
based on Generally Accepted Accounting Principles (GAAP) but perhaps more impor-
tantly by the availability of financial reports from any country using the Internet.
Methodologically also, financial experts are familiar with a host of limitations sur-
rounding conventional profit measures. Profitability is easily boosted by financing
growth through debt rather than equity. Earnings per share rise, but the value of the
shares drops due to the higher financial risk. Profits also fail to take into account the
additional cash required to build them. Profit growth therefore can easily disguise an
accelerating cash flow crisis.
Finally, and most important of all, profits are fatally flawed as a measure of the value
of a business. Profits and Return on Investment (ROI) measure the past results of the
business, not its future potential. Focusing on profitability as the primary objective
invariably creates short-term management willing to sacrifice the business’s long-
term international competitiveness on the altar of short-term profits. Managers know
that it is easy to boost current earnings by raising prices, cutting costs, reducing prod-
uct development, brand support and curtailing investment. Often the board of
directors can be fooled for a year or two into thinking such actions are producing a
business ‘turnaround’. In fact, most such profit improvement programmes are merely
asset stripping. Rather than representing improved potential, sudden profit improve-
ments often represent a destruction of the company’s future. As Box 1.2 shows, such
misunderstandings can influence national policies too.
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Box 1.2 Long-term growth versus short-term profitability:

the case of the UK
Over the last 25 years, manufacturing in the UK has shown a remarkable paradox of record productivity
growth with sharply declining international competitiveness.
Between 1980 and 2003, UK manufacturing output per person grew faster than those of Japan and the
rest of Europe (with the exception of Sweden). Yet while world markets expanded, UK manufacturing output
failed to keep pace. UK manufacturing output grew by 26 per cent between 1980 and 2003. In contrast,
despite slower productivity growth, manufacturing output jumped by 85 per cent in Japan, over 50 per cent
in France, Belgium and the Netherlands and 30 per cent in Italy
What explains this paradox? Productivity is measured by dividing outputs (numbers of cars, machine tools
sold, etc.) by inputs (number of employees, amount of capital, etc.). UK companies focused on cutting
inputs – denominator management. Overseas competitors focused on expanding outputs – numerator
management. British managers sought to reduce costs and boost short-term profits. Their competitors
looked to new marketing opportunities, invested in new products and technologies, and built competitive
advantage. The result was that foreign companies expanded while employment in UK manufacturing
contracted by almost 50 per cent (3.4 million employees, representing just 12 per cent of all jobs) and the
share of manufacturing in GDP fell from 32 per cent in 1973 to below 16 per cent in 2003.
Growth
Second to profits, growth of turnover or assets is a central objective for over four out
of five firms.4 Growth can be achieved internally or via acquisitions. When very high
rates of growth are achieved, acquisitions invariably play the major role. Some compa-
nies have given an extraordinary priority to growth and size. Saatchi & Saatchi, under
the influence of Professor Theodore Levitt of the Harvard Business School, propagated
what they called ‘the law of dominance’, which said that ‘being the world’s number
one company is wonderful, two can be terrific, three is threatened and four is fatal’.
Size became the overwhelming objective of the company and it pursued a hectic series
of acquisitions to create the world’s largest communications business.
Several explanations for the growth objective have been made. Many managers
believe, like Saatchi & Saatchi, that there is a link between size and ultimate prof-
itability. Unless a company becomes one of the biggest players, they believe that it
will be vulnerable to stronger competitors. Others have shown the link between size
and managerial salaries. Prestige and management perks are also correlated to the size
of the business. Accounting procedures also encourage acquisitive growth. In many
countries, accounting conventions allow the cost of the acquisitions to be excluded
from the income statement, which has the effect of inflating profits and earnings per
share and disguising the true cost of acquisitions. By contrast, internal growth is less
attractive to these hypergrowth companies because it is slower and because invest-
ments have to be written off against the profit and loss statement.
Growth is a sensible objective but, taken to excess, the pursuit of size has proven
even less robust as a strategy than profitability. The great majority of companies that
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9736 MMST_C01.QXD 12/5/05 2:44 PM Page 6
pursue it prove to be very short-lived phenomena. In fact a computer model used to

explain corporate failures found that very rapid sales growth was the best predictor of
subsequent collapse.5 It is easy to see why. Very rapid growth with its sudden, new
challenges, hidden threats and organisational strains is virtually unmanageable.
Further, excessive rates of growth invariably involve higher levels of financial risk as
the company takes on more debt. Finally, given that the stock market values compa-
nies efficiently, then with bid premiums normally adding 50 per cent to the pre-bid
share price, truly enormous improvements in the target company’s performance must
be achieved by the acquirer. In practice, many of these companies appear to make
only the most cursory examination of potential synergies. Deals are often made on
faith that rapid market growth, inflation and rising asset prices will make expensive
purchases subsequently good value.
When these forecasts prove too optimistic, the real cost of the growth strategy
becomes clear. Investors see a business that has extended beyond the capabilities of
its management, highly geared and with a weakened capacity to compete in its core
activities. Shareholder value often collapses. For example, many of the dot.com com-
panies that had excited investors in the late 1990s with their growth prospects saw
their market values collapse by 90 per cent in 2000, as their lack of cash-generating
potential became apparent. Morale and employee motivation decline as savage cut-
backs become necessary to meet interest rate obligations, and even creditors see their
loans written off.
Shareholder value
Currently, the most intellectually respected business objective is shareholder value.
This has considerable legal and conceptual merit. The company, it is argued, ‘belongs
to’ its legal owners, who are its shareholders. The task of management is to enhance
the value that these shareholders obtain. Shareholder value is increased in three
ways: dividends, appreciation in the value of the shares, and cash payments.
Operationally, this means managing the business to generate cash rather than
accounting profit. If the aim is to maximise shareholder value, the business should
invest only if it can achieve a return greater than shareholders could obtain for them-
selves by investing the cash elsewhere. If a part of the business is worth more to
another company than it is to its current management, then it should be sold forth-
with and the receipts handed back to shareholders.
Management seeking to maximise shareholder value will normally pursue policies
quite different from those geared to earnings or growth. Several studies have shown
that policies to increase short-term earnings can decrease shareholder value.6
Similarly, the stock market is quickly sceptical of companies planning acquisitive
growth strategies, and the value of the acquirer’s shares normally drops precipitously.
But again, seeking to maximise shareholder value runs into several practical problems
as well as severe conflicts of interests among stakeholder groups. Developing any
strategy consists of four components: (1) problem identification – management has
to identify the need for change; (2) developing strategic options – creating alternative
solutions to the problem; (3) evaluating the options – which looks the best solution;
and (4) implementation – making the chosen strategy work and deliver results.
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Shareholder value analysis only focuses on stage 3. It provides the techniques for
deciding which option is most likely to maximise shareholder value.7 It provides no
insight into how problems can be identified or strategic options created. These
questions require managers with knowledge of how customers, competition and
technology are changing and the creative ability to capitalise on the problems and
opportunities arising from these changes.
Nor does shareholder value analysis give any help on the implementation stage.
Successfully implementing a strategy depends upon the firm’s core capabilities and
the motivation and drive of its employees. It is impossible to produce high returns to
shareholders in competitive markets if the organisation lacks the skills and assets to
innovate, to run effective operations processes and to provide high levels of customer
support. Maximising shareholder value is also not an objective that motivates
employees on the front line. Employees need measures and objectives that they can
directly influence and for which they are specifically responsible.
Shareholder value – the rising market value of the company – is best seen as a result
rather than an objective. It is the result of management successfully choosing and
implementing a variety of strategies that satisfies customers, meets financial targets,
builds efficient operational processes and invests in the firm’s skills and future asset
base. The danger with treating shareholder value as an overriding objective of the
business is that it becomes synonymous with short-term profit maximisation.
Managers then focus on reducing costs and eliminating losses rather than on capital-
ising on the opportunities created by a changing environment. Hewlett-Packard (see
Box 1.3) is an example of this danger.
Box 1.3 Hewlett-Packard FT
The share price of Hewlett-Packard jumped when Carly Fiorina was appointed chief executive in 1999 and it
jumped again when she was fired six years later. In the meantime, it fell by more than half.
Ms Fiorina did the things expected of transformational leaders. She embarked on a public relations
offensive. Within the company, ‘coffee with Carly’ took over from ‘the HP way’. On public appearances, the
immaculately tousled hair of America’s leading female executive quickly made her the most readily
recognised business figure in the country.
She demanded rounds of cost reduction from subordinates. Sometimes such economies lead to greater
efficiency, sometimes they undermine the long-term prospects of the business. In the absence of intimate
knowledge of the organisation in question, it is hard to tell. No matter: in either case the process enhances
earnings per share in the short run.
But the real test of the corporate saviour is whether she can land the big deal. Ms Fiorina first made a pitch
for the consulting business of PwC, only to learn that many of the opinionated folk in that business were
unenthusiastic about a merger with a manufacturing company under her leadership. But she completed the
acquisition of the ailing Compaq. The results were disappointing and last week Ms Fiorina paid the price.
Source: Financial Times, 15 February 2005.
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Customer satisfaction
A fundamental problem with all three previous approaches is that they ignore the
customer. Satisfied customers are, however, the source of all profits and shareholder
value. Customers can choose from whom they buy, and unless the firm satisfies them
at least as well as competitors, sales and profits will quickly erode. More companies
are putting at the top of their agenda winning and retaining customers via increasing
customer satisfaction. Companies such as GE, IBM and Dell now comprehensively
and systematically survey customers on a regular basis to determine how satisfied
they are. These scores are benchmarked against the customer satisfaction scores
achieved by competitors. Dell, for example, now places increasing customer satisfac-
tion ahead of return on investment and market share as key corporate objectives. The
aim is to forge strong, enduring relationships with customers.
The fate of the leading US brewer Schlitz is a telling example of the results of orient-
ing managers towards financial measures, rather than satisfying and retaining
customers.
Schlitz decided on a programme to boost shareholder value. The firm shortened its
brewing process by 50%, reduced labour costs, and switched to less costly ingredients.
As a result, it became the lowest cost producer in the industry, its profits soared and its
stock price rose to a high of $69. Unfortunately, however, Schlitz’s aggressive cost
cutting campaign also degraded the quality of its beer. The firm was receiving constant
customer and dealer complaints and its market share was slipping badly. A new
management team attempted to get product quality back on track, but by then
consumers had such a low opinion of Schlitz’s beer that the company could not recover.
Schlitz’s market share position slipped from No. 2 all the way to No. 7, and its share
price dropped to a mere $5.8
Figure 1.1 contrasts the market-led business with the finance-led one and shows the
nature of the trade-offs. The latter has as its central goal profitability. The key plan-
ning mechanism is the financial plan or budget. Assets, debts, costs and expenses are
controlled to achieve the financial goal. The ‘marketing decisions’ of product, price,
promotion and distribution are manipulated to control the financial variables. So in
hard times, new product development, investment and promotion are likely to be
curtailed to boost profits. Such policies, of course, have the downside that they trade
off improved short-term financial performance for lower long-term market effective-
ness. By contrast the market-led organisation focuses primarily on satisfying
customers. It defines the market segments to satisfy, researches the wants and expec-
tations of these customers and then plans the products, pricing, promotion and
distribution strategies that will most effectively match these expectations. Business
decisions here flow back from an understanding of customers rather than from a
financial requirement.
The market-led approach, which seeks market leadership through superiority in
meeting customer needs, has often been associated with Japanese companies; the
profit-led one with British and US companies. For example, a study of a matched
sample of British, US and Japanese companies saw western companies overwhelm-
ingly oriented to profit (Table 1.2).9 Again the market-led approach can be taken to
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Financial Financial Marketing Buyer Marketing

objective variables decisions expectations objective
Turnover Performance
Product
Costs Design
strategy
Inventory Choice
Margins Price Target

Return on Pricing
Turnover Discounts market
investment
Debt Value segment
Financial Turnover Distribution Service

Marketing
programme Assets and Delivery
plan
Expenses service Credit
Turnover Advertising Information

Expenses and Image
Assets promotion Security
Figure 1.1 Strategy

Financial versus
market orientations
damaging extremes. Ultimately, customers would most prefer the highest quality, first-
class service and rock bottom prices, but it would be foolish for a company to offer
these. Indeed during the 1990s many Japanese companies ran into severe financial dif-
ficulties as their aggressive market-led approach led to excessive investment and
inadequate profit margins. In practice, the firm has to negotiate a balance between the
needs of its shareholders for profits and the desire of its customers for value.
Table 1.2
Japanese US British
How well does ‘good
short-term profits 27% 80% 87%
are the objective’
describe your Note: Based on a matched sample of 90 UK, US and Japanese companies
Source: Adapted from Kagona et al. 1985, cited in Doyle et al. 1992.
company?
Other objectives
These four goals are not an exhaustive list of alternatives. Some companies focus on
operational objectives and see these as the drivers of financial and customer perform-
ance. Here managers identify those internal processes that the business must excel at
to achieve high performance. These may cover measures of manufacturing excel-
lence, quality and productivity. More recently, other companies have highlighted
innovation and learning objectives. Success today is no guarantee of success tomorrow.
Intense global competition means that companies must make continual improve-
ments in their products and processes to stay at the forefront. Companies such as 3M
have specific innovation targets – at least 25 per cent of any division’s profits must
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come from products introduced within the last five years. Others set defined target
improvement rates for internal operations such as on-time delivery, cycle time, defect
rate and yield.
Service companies, in particular, often place satisfying employees as a key objective.
They regard employees as the generators of both satisfied customers and shareholder
value. Only if employees are satisfied and motivated by their jobs will they strive to
satisfy increasingly discerning customers. Satisfied customers, who remain loyal to
the business and spread positive ‘word of mouth’ publicity about it, are in turn the
basis of continuing profits and enhanced shareholder value.
Interest groups have lobbied further goals: the community interest – local and
national; environmental protection; advancing the causes of minority groups;
enhancing relationships with suppliers; or simply minimising risks.
In reviewing the evidence on company goals, at least three things seem clear. First,
while any of these goals may be necessary at some point in the organisation’s history,
if it is to survive, no single one is sufficient. Second, focusing on one goal involves
trade-offs sooner or later with others. Maximising short-run earnings will reduce the
firm’s long-run marketing competitiveness. Rapid growth leads to spiralling risks
being absorbed by shareholders and creditors. The pursuit of shareholder value can
erode the trust of employees and the local community as shareholder interests domi-
nate. Third, the more sharply an organisation focuses on one goal and seeks
‘excellence’ in it, the more extreme these conflicts become and the more likely that a
disequilibrium situation is created. Sometimes the break-up is quick and sudden; in
others it is a longer-term decline as groups whose interests have been neglected with-
draw organisational support. In both situations, history suggests that ‘excellence’ is a
very dangerous concept.
Stakeholders’ objectives and constraints
The fundamental problem of using any one of the above objectives is that they orient
management to a single perspective and to one group of stakeholders. Today, how-
ever, a business needs to adopt a multiple perspective and to satisfy different groups
of stakeholders, which may include shareholders, employees, managers, customers,
suppliers, creditors, the government and the community in which it operates. Where
management focuses on one perspective, other interests are devalued.
A central task of top management is reconciling these diverging and partly conflict-
ing interests. Figure 1.2 illustrates the expectations of the different stakeholders in a
typical organisation. In a well-balanced organisation, reconciling these interests is
not usually difficult. One reason is that stakeholders do not usually seek to maximise
their interests; instead they usually look for satisfactory returns. In addition, expecta-
tions are normally incremental – people’s demands are based on what they achieved
in the past. Wage-earners or shareholders do not normally increase their demands
upon the firm suddenly and radically.
Effectively, managers act in a tolerance zone. The tolerance zone is a performance
band in which the firm is satisfying the interests of all its key stakeholder groups. As
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S
atio
n Com ecurity
m p ens Job pensa
Co estig e sati t
Pr er sfac ion
Pow tion
Fa discr
Emp
No
rs
ir e im
age loye
Man es
t
en
mp ina
plo s
Em Taxe
ym
ts
loy tion
en
me
Mi ups
nm
gro
no
nt
ver
rity
Go
Regular
ity
onment
Supplie
Preser v nt
ation
Firm
of busin
n
Continu
me
Commu
Employ
paymen
of envir
rs
ess
ity
Cu
ts
st rs
om ito
Pr er ed
od
u
s Cr t
Se ct q Shareholders es
r u t er rity l
Va vic alit In cu ita
lue e y Se cap
Dividends of
Capital growth
Figure 1.2 Safe investment
Stakeholders and
their expectations
Figure 1.3 illustrates, performance falls outside this equilibrium zone and the viability
of the firm and its management comes under threat under two circumstances. The
first is when it fails to achieve minimum levels of performance. The second is when it
achieves exceptionally high levels of performance on one or more of these objectives.
The latter arises because maximising on one eventually means minimising on others.
For example, Schlitz sought to maximise earnings per share and ended up minimis-
ing on customer satisfaction.
The major stakeholders, the nature of their objectives and their areas of tolerance are
as follows.
Shareholders
These are the most obvious stakeholders. They have invested in the enterprise with
the expectation of rewards in terms of dividends, share appreciation and capital
repayments. If dissatisfied, they can fire the executives and sell or close down the
firm. While legally their power to maximise shareholder value is absolute, in practice
it is normally severely constrained. Today’s shareholders are predominantly institu-
tional investors rather than active owners. These institutions have a large portfolio of
shares and will invariably sell the shares of a disappointing performer rather than
seek to oust its management. Often the terms of their charters prevent these institu-
tions playing an active role in the companies whose shares they hold.
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Earnings
per share
Business Shareholder
growth value
Quality
Environmental
and
concerns
service
Motivated Minimise
employees risk
Figure 1.3 Market share

Corporate
Disequilibrium zone
objectives:
disequilibrium and Tolerance zone
tolerance
The consequence is that companies rarely seek to maximise shareholder value and a
substantial zone of tolerance is available. This is evidenced in both the relatively low
priority that managers give to shareholder value and the high bid premiums required
to take over a company.
However, the power of shareholders can be activated if other stakeholder groups are
not alert to their needs. If managers, employees or other groups are obtaining exces-
sive rewards, or if the business is so poorly managed that the dividends or equity
values become completely unacceptable to shareholders, then a disequilibrium situa-
tion is created. Then investors do step in and change the top management. Or, more
commonly, an outside group bids for the company, taking advantage of its low valua-
tion, and seeks to create greater value for its own shareholders.
Managers
Salaries and bonuses, perquisites and power are among the major motivators of
senior executives. The separation of corporate ownership and control has unques-
tionably increased the power of managers.
Evidence of this is in the salaries of chief executives and senior managers, which have
grown significantly faster than shareholder value over the last decade. It is also illus-
trated in the willingness of executives to invest in growth and diversification, even
though the return has been less than the true cost of capital. But again executives are
normally sensitive to the risks of maximising their potential for personal gain. This
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zone of tolerance is evidenced in the premiums that executives normally obtain

when changing companies. Unduly high managerial rewards create jealousy and
pressures among other members of the coalition on whom the business’s stability
depends. Most company boards also have compensation committees that dampen
managerial expectations. Similarly, the pressures to grow and diversify are also con-
strained by the need to increase earnings per share or return on investment, or to
maintain interest-cover conventions. Where such constraints are breached, managers
risk an eventual collision with other groups of stakeholders.10
Customers
In a free enterprise system, customers are potentially the most powerful stakeholder
group. If their expectations are not met, they can switch to alternative brands and so
erode the company’s revenue base and ability to satisfy all other stakeholder groups.
Again, however, customers appear to have substantial tolerance levels. Customers are
normally reluctant to incur the risks and costs of changing their existing repertoire of
suppliers. In well-established markets it is very difficult for new entrants to succeed.
Only when customer service and product quality fall substantially below those of
competitors will the company’s market share fall precipitously. Nevertheless, British
and American postwar industrial history is replete with examples of where the excess
pursuit of other stakeholder interests, the orientation to short-term profit, workers’
reluctance to change, or diversification, has led to an erosion of customer support
and a loss of markets.
Employees
Workers outside the executive ranks seek a combination of employment security,
compensation and job satisfaction. As stakeholders, they are more dependent upon
the firm for their livelihoods than shareholders and less able to control events than
senior managers. Their power to achieve their goals depends upon their degree of
organisation, the tightness of the labour market for their special skills, and the recog-
nition of managers and shareholders of the importance of motivated employees.
Again workers are not maximisers. Consciousness of switching costs, uncertainty and
interests outside their firm orient them to accepting suboptimal returns from existing
employers. However, a failure to meet their minimum expectations may create mili-
tancy; more certainly it will curtail the commitment of employees to provide high
levels of quality and service to other stakeholders.
Creditors
Banks and other lenders have a legal right to specified interest and capital repay-
ments. Having limited upside potential in their assets, creditors want the firm to be
risk averse. If the firm cannot meet its obligations to creditors, then they can liqui-
date the firm’s assets to meet their claims. Normally, however, creditors are reluctant
to do this and will defer repayments if they believe the business can be turned round.
Only if the assets are at increasing risk are creditors likely to liquidate the business.
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Other stakeholders with claims on the enterprise are suppliers, governments, the local
community, minority groups and so on. The survival of the business depends upon the
support, or at least the non-active opposition, of each of these. Again, for each of the
groups there is a broad tolerance zone, within which passivity can be expected.
Developing balanced objectives
Broadening the span of objectives means recognising that ‘excellence’ is unlikely to

be obtained on a single measure. Not surprisingly, those companies that have with-
stood the test of time – Unilever, Shell, Procter & Gamble, Boeing, BMW, Siemens,
3M and Nestlé – are not outstanding on any single measure of performance. They
recognise that to maximise profits today would mean sacrificing market position
tomorrow; maximising sales growth means eroding shareholder value. Rather, they
see the task as achieving a satisfactory level of performance across a multiple, com-
peting set of criteria.
There are three mechanisms for developing a balanced set of objectives. Ideally, all
three should be implemented, but each individually makes a contribution.
Balanced organisational representation

To prevent a company being captured by one interest group, the various stakeholders
should be represented at the highest level. In Japan this is done with remarkable
effect through the keiretsu. Each of the major Japanese companies sits in a web of
strong, permanent relationships with its major creditors, suppliers, key customers
and other important stakeholders. Internal and external stakeholders are bound
together by complex and evolving ties of mutual benefit and commercial interest. All
parties – customers, suppliers, employees – understand that they can all gain as the
firm advances. The benefits of these negotiated and mutually agreed objectives are
that each of the parties is willing to make long-term investments and to accept the
occasional short-term economic sacrifices that are inevitable in a turbulent environ-
ment. Not surprisingly, major western companies such as Ford, IBM and Nokia are
beginning to set up their own keiretsu-like structures.11
An alternative approach exists in Germany, Switzerland and some other countries of
continental Europe with the use of supervisory boards or Aufsichtsrat. These, consist-
ing of representatives of shareholders, management, trade unions, creditors and other
stakeholder groups, supervise the management board (Vorstand) and check that its
strategy is consistent with their own objectives. This structure sharply contrasts with
American and British corporate boards, which in practice are dominated by one
stakeholder group – senior managers. Not surprisingly, it is in these two countries
that large firms have been prone to favour interests inimical to other groups and, as a
result, to create crises for themselves. A two-tier board structure on the German
model, with key interest groups represented on the supervisory board, would seem
the most obvious way of representing their legitimate interests.
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Developing balanced objectives
Defining the organisation’s mission

A second means of ensuring that the main interest groups are considered is through
the company’s mission statement. Most companies now have a mission statement
that aims to spell out their central purpose and develop shared values. For example:
‘Dell’s mission is to be the most successful computer company in the world at delivering
the best customer experience in markets we serve.’
As Dell illustrates, the major function of the mission statement should be to define
the key stakeholders whom the corporation will seek to satisfy and, in broad terms,
describe what strategy it will pursue to meet their objectives. The objectives written
into the mission statement should contribute to motivating the loyalty of those on
whom the success of the business depends, and encouraging management to evaluate
their policies in the light of their stakeholders’ expectations.
A good example of a mission statement is that of the electronics company Philips
shown in Figure 1.4. The Philips way outlines succintly the company’s objectives, the
key stakeholders and how management will monitor progress.
Philips Electronics
Our mission
We improve the quality of people’s lives through the timely introduction of meaningful
technological innovations.
Our vision
In a world where technology increasingly touches every aspect of our daily lives, we will be
a leading solutions provider in the areas of healthcare, lifestyle and enabling technology,
aspiring to become the most admired company in our industry as seen by our stakeholders.
Our values
● Delight customers
● Deliver on commitments
● Develop people
● Depend on each other
Our strategy
We will:
● increase profitability through re-allocation of capital towards opportunities offering more
consistent and higher returns

● leverage the Philips brand and our core competencies in healthcare, lifestyle and
technology to grow in selected categories and geographies
● build partnerships with key customers and suppliers, both in the business-to-business
and business-to-consumer areas
● continue to invest in maintaining world-class innovation and leverage our strong
intellectual property position
● strengthen our leadership competencies
Figure 1.4
● drive productivity through business transformation and operational excellence
Philips mission and
vision statement
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Creating the balanced scorecard

Broad objectives need to be refined into definite goals with specific measures of
attainment if they are going to provide clear incentives for performance. In the past,
these measures have been too focused on financial results. Today, management needs
a broader perspective that incorporates the interests of the various stakeholders and
requirements for achieving long-term competitiveness.
For most businesses, the diverse objectives can be incorporated into four perspectives:12
■ Financial perspective – meeting the objectives of shareholders.
■ Customer perspective – meeting the needs of customers in highly competitive markets.
■ Operational perspective – achieving on the key levers that drive performance excellence.
■ Internal perspective – meeting the expectations and building up the capabilities of

employees whose skills determine the company’s future.
The specific goals will depend upon the nature of the business: its industry, manufac-
turing configuration, type of customers and market dynamics. Figure 1.5 illustrates
the type of scorecard that might be used. The balanced scorecard has the advantage
Financial perspective
Goals Measures
Survive Cash flow
Succeed Quarterly profits
Prosper Return on shareholder funds
Recognition Share price
Operations perspective
Goals Measures
Technological Competitive benchmarking
Manufacturing excellence Productivity
Time-to-market Benchmarking
Quality Total quality
Consumer perspective
Goals Measures
Satisfaction Customer surveys
Responsiveness On-time deliveries
Loyalty Repurchases
Market share Share growth
Internal perspective
Goals Measures
Employees Satisfaction surveys
Figure 1.5 Internal growth Sales growth
The balanced Innovation Number of new products
Development Training days
scorecard of
objectives
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Developing a strategy
of avoiding overloading managers with information, but giving them the multiple
perspectives essential for the strategic development of the business. It is a positive
sign that more and more far-sighted western companies have recently taken an inter-
est in developing a balanced scorecard approach to reviewing business performance.
To meet their objectives, management needs a plan or strategy. Rather than a single,
comprehensive set of objectives and strategies, most companies have a hierarchy of
interrelated strategies, each developed at a different level. Typically, there will be a
corporate strategy for the whole company, individual strategies for each of the com-
pany’s business units and, finally, a strategy for each market or product.
A strategy can be defined as a set of decisions taken by management on how the busi-
ness will allocate its resources and achieve sustainable competitive advantage in its
chosen markets. Strategy, therefore, sets the direction of the business – in which prod-
ucts and markets it is going to invest its resources and efforts – and the means of
getting there – how it is to create customer preference in these areas.
Some examples of strategic decisions are as follows:
■ ICI, one of the largest chemical companies, decided to make a series of acquisitions
to build its Paints Division into the world’s number one. It believed that economies
of scale and global branding would provide sustainable competitive advantage.
■ Baskin Robbins, the ice-cream business, decided to build a major presence in
Russia. Management believed it could offer quality and variety superior to that
offered by domestic competitors.
■ Virgin, the company funded by Richard Branson, decided to diversify into finan-
cial services. It believed that the Virgin brand name would encourage customer
confidence and trust.
■ McDonald’s decided to broaden its traditional menu by adding salads.
Management believed that this would strengthen the business by offering
customers more choice and healthier eating.
Resource allocation
The two key dimensions of strategy are the resource allocation decision and the
development of a sustainable competitive advantage. The resource allocation decision
is the choice of which products and markets offer the best opportunities for invest-
ment. It is customary to set out the broad choices in terms of the growth direction
matrix (Figure 1.6). A business can grow in four directions.
Market penetration is normally the least risky alternative, at least in the short run.
Here the business sticks to its existing products and markets, and aims to grow
through increasing customer loyalty, gaining market share or expanding the market
for its products. ICI’s Paints business pursued an aggressive policy of gaining market
share through acquisitions.
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Current products New products
Market penetration Product development

strategies strategies
• Increase customer loyalty • Product improvement
Current • Increase market share • Product line extensions
markets • Increase product usage: • New products for same
– increase frequency of markets
use
– increase quantity used
– new application
Market development Diversification strategies

strategies
• Vertical integration:
• Expand markets for – forward integration
existing products: – backward integration
New – geographic expansion • Diversification into related
markets – target new segments businesses (concentric
diversification)
• Diversification into
unrelated businesses
(conglomerate
Figure 1.6 diversification)
Alternative growth
directions
Eventually market share strategies will be constrained by the size of the market and
the entry of new products. A second strategy then becomes product development.
Here the company stays in its current market, but introduces improved products,
product line extensions and new products. McDonald’s introduction of salads is one
example of this strategy.
The next level of strategy is market development, where the firm pushes its current
products into new geographic markets or new segments of the market. Baskin
Robbins’ investments in Russia are an example of this strategy.
The final strategic option is diversification. This is typically the most risky option
because it requires learning about both new markets and new products. There are dif-
ferent types of diversification, each with varying characteristics and levels of risk.
■ Forward integration. This involves moving ‘downstream’ to acquire operations pre-

viously undertaken by third parties such as wholesalers or retailers.
■ Backward integration. Here the company moves ‘upstream’ to take over functions
previously done by suppliers.
■ Concentric diversification. Here the firm looks for new products or new markets that
have synergies with its existing products or markets. The new activities can then
lead to lower costs or enhanced marketing effectiveness. Virgin’s move into finan-
cial services is an example.
■ Conglomerate diversification. This occurs when the products or markets have no
relationships with the current products, technology or markets. This is likely to be
the most risky form of diversification.
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Sustainable competitive advantage

The resource allocation decision determines in which products and markets the busi-
ness will compete. To win in these areas, the firm needs a sustainable competitive
advantage. This is the capability to make target customers an offer that they perceive
as providing superior value to the offers of competitors. The essence of business strat-
egy is winning the choices of customers.
Customers buy from those competitors that they perceive as offering the best value.
Perceived value consists of three elements: the perceived benefits offered by the com-
pany’s brand; its price; and the other costs of owning it (Figure 1.7). A company can
gain competitive advantage, therefore, through offering superior benefits, lower prices
or a reduced cost of ownership. The product may command a premium price if it offers
superior benefits with other ownership costs that are lower or at least competitive.
The perceived benefits are a function of the product’s performance and design, the
quality of the services that augment it, the staff who deliver it, and the image of the
brand which the company succeeds in communicating. The price is the money that
the customer has to purchase the product. The other costs of ownership are those
expenses that occur once the product is purchased. These may include installation,
insurance, staff training, maintenance, energy consumption, trade-in value and the
psychological costs of risking a switch to a new supplier.
A competitive advantage is of limited value if it is easily copiable. Management need
strategies to sustain their advantage by building barriers to entry. Economists describe
many types of entry barrier, including high capital requirements, scarce raw materi-
als, scale economies, favourable locations, patents and licences. But the two most
common barriers are the linked advantages of brands and core competences based on
organisational effectiveness. The reputation of a successful brand, built upon long
and successful use, gives customers confidence in the product or supplier and makes
them reluctant to switch. The core competences of the business are the special tech-
nical and marketing skills built up by its staff which, within an effective organisation,
are deployed to continually update, innovate, and enhance the value it offers to its
customers. A business with strong core competences and an organisation committed
to success sustains its advantage with learning, change and constant improvement.
Perceived
+
benefits
Ownership
Perceived value –
costs
Figure 1.7
Perceived value and Price –
competitive
advantage
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Criteria for strategic success
Management is continually involved in proposing or approving strategic options.

Decisions are made on new products, new markets, acquisitions, strategic alliances
and a host of other strategic alternatives. Five factors determine whether a strategy
will be likely to contribute to success.
Fit to the market environment

The primary determinant of whether a product or business will generate results is its
fit to the needs of customers. If customers do not perceive an offer as having a com-
petitive advantage – offering superior value – they will not buy it, or buy it in the
desired amounts. Today’s outstanding companies are those that customers see as
meeting their needs most effectively. The needs of the market are shaped by the envi-
ronment – technology changes in the population’s demographic structure, the level
of economic well-being, politics, and changes in culture and values.
For example, Nokia was Europe’s most successful company in the 1990s. Its growth
and profitability were due to management seizing the opportunities created by the
explosion of growth of the mobile phone market. Nokia’s continuing competitive
advantage lay largely in the customer appeal of its phone designs.
Timing: nothing fails like success

The problem for managers is that the environment and hence the needs of customers
change. What provides an excellent fit to the market environment today will not do
so tomorrow. In industry after industry – cars, consumer electronics, photography,
computers, retailing, semiconductors, earth-moving equipment – firms once thought
impregnable have been broken and defeated by an inability to respond to the speed
of change. Companies such as General Motors, Philips, Kodak, Marks & Spencer,
Sears, Texas Instruments and Caterpillar, which once totally dominated their markets,
now struggle for survival.
As with evolution, the saying ‘nothing fails like success’ is almost inevitable.
Paradoxically, the more successful a firm is today, the more vulnerable it is tomorrow.
A firm that perfectly adapts its skills, assets, distribution channels and thinking to
meet current opportunities and beat all current competitors risks becoming com-
pletely wrong-footed when these opportunities disappear. For example, for over one
hundred years Swiss companies dominated the watch market. Their success was due
to focusing all their resources, skills and culture around precision engineering.
Unfortunately, when electronics appeared, all the skills, assets, systems and values of
the Swiss were counterproductive and the industry had to be totally restructured.
Many observers consider Microsoft’s lead in the computer industry to be unassailable.
But its founder and chairman, Bill Gates, says he is driven by a ‘latent fear’ that the
company could become complacent and allow itself to be overtaken by nimbler com-
petitors. It has happened to other large companies such as IBM and General Motors, he
points out. Nokia’s dominant mobile phone position in the 1990s has been eroded by
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Criteria for strategic success
competitors which introduced innovative designs earlier and more cheaply and this is
partly responsible for a fall in the value of Nokia stock by two-thirds since its peak.
To maintain success – which history suggests is a very difficult task – management
needs continually to challenge the strategy and the mindset of the business.
Companies like to continue doing what they have done in the past. But for many
companies ‘sticking to their knitting’ becomes their epitaph.
Efficiency versus effectiveness

Efficiency and effectiveness are two concepts at the heart of strategy. The former
reflects productivity; it is the relationship between outputs (e.g. production, profits)
and inputs (e.g. labour, assets). Efficiency is internal to the firm, is easily measured
and can often be improved quickly. In contrast, effectiveness is about satisfying cus-
tomers’ needs; it is externally determined and not easily measured, and achieving it is
usually a lengthy process. However, effectiveness is much more important than effi-
ciency to the survival and success of the organisation.
Efficiency is concerned with costs; effectiveness with identifying opportunities to
create markets. Peter Drucker conveyed the essence of the difference when he wrote:
‘Efficiency is doing things right. Effectiveness is doing the right things.’ In many
companies an obsession with efficiency and cost cutting is antithetical rather than
complementary to effectiveness. The essence of effectiveness is innovation – finding
new and better means of meeting the needs of customers. Focusing on reducing costs
is a hopeless and retrograde effort if the business is producing products without
market appeal. Management has to ensure that the primary focus of the organisation
is entrepreneurial rather than internal; efforts are put into making it effective before
making it more efficient.
Speed and decisiveness

In today’s dynamic and intensely competitive markets, speed and decisiveness are
essential for strategic success. Time has become a competitive weapon. Companies
that are fast to innovate, manufacture and distribute, and quick to respond to cus-
tomer requirements, on average earn and sustain substantially higher profits and
achieve bigger market shares than their slower-moving competitors.
However, strategic success requires more than speed; it also requires the decisive com-
mitment of resources. The evidence suggests that fast innovators will fail to earn the
rewards and achieve strong and lasting market positions unless they commit substan-
tial marketing and promotional resources behind the product and aggressively seek to
build market acceptance. Without this decisive commitment, they will be caught up
and overtaken by competitors that follow in their slipstream. History suggests that
smaller companies without access to sufficient resources should look to licensing or
partnership agreements to lever the resources they need for successful entry.
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Organisational effectiveness
Enduring international competitiveness depends first upon the core competences,
or unique body of technical and marketing skills, possessed by the personnel of the
firm. Second, it requires staff having the commitment to deploy these skills effec-
tively. Effective deployment of core capabilities means orienting their application
to opportunities in the market, to fast implementation and to achieving a position
of leadership.
Business is essentially Darwinian in nature. Environmental forces – technological
change, competition, changes in demographics, new trading relationships, econom-
ics, etc. – result in the survival of those firms best fitted to the environment. Survival
and fit depend upon the adaptability of the organisation and management’s ability to
match strategy to this changing world (Figure 1.8).
Strategic intent
To be a leader in today’s globally competitive market requires two attributes – an

ambitious intent and outstanding competences. Strategic intent refers to a conscious
commitment of top management to focus the resources and energies of the organisa-
tion on achieving a leadership position in the market.13 Like an athlete competing at
the top level, there is no chance of success unless an organisation is totally dedicated
to winning, and willing to make almost any sacrifice to get the prize. Organisations
in which top management have not inculcated this shared vision of success do not
succeed because they do not make the effort or develop the capabilities.
Companies such as Coca-Cola, GE, Canon, Boeing, Federal Express and Sony focus
on enthusing their employees with this shared goal. Canon’s long-term strategy was
called internally ‘Beat Xerox’, Komatsu’s was ‘Encircle Caterpillar’. These were the
rallying cries that stimulated their workforces steadily to close the gap, year after
year, as they strived, ultimately successfully, to unseat the industry leader. Creating
Changing
environment
Figure 1.8 Strategy Organisation

Adapting to a
changing
environment
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Core competences
shareholder value generates little enthusiasm as an organisational goal. Why should

workers make extraordinary efforts to satisfy a shifting body of faceless investors? The
competitive challenge of working as a team to make it the number one can create
this commitment.
Seeking leadership does not necessarily mean global dominance of major markets.
For a smaller business it is more likely to mean seeking, at least initially, to become
leader in selected niches, specific distribution channels or particular market seg-
ments. But the concept of strategic intent is a recognition that companies with a
small market share are exceedingly vulnerable. In an economic downturn, customers,
distributors and retailers are likely to focus their buying on suppliers with a substan-
tial share. The volume of a marginal supplier may become too small to support the
required service levels and to generate the resources for investment in new products
and markets.
Strategic intent is a long-term, shared vision stretching from a minimum of ten years
up to an indefinite future. The skills and infrastructure needed to become the best are
not acquired quickly and once acquired need to be continually adapted and
enhanced. A practical problem is that few people can sustain the enthusiasm and
commitment for a goal that may not be reached for 10 or 20 years. Consequently, to
operationalise strategic intent, top management set ‘challenges’ that are of much
shorter duration, yet contribute to the ultimate goal. Hamel and Prahalad describe
how Komatsu’s 30-year strategy to overtake Caterpillar consisted of a series of almost
annual targets. These included challenges to introduce specific new models, to enter
new markets and to achieve cost reduction and quality targets. Such programmes
have the effect of creating a sense of urgency in the business, developing necessary
capabilities and providing milestones and review mechanisms and progress towards
their ultimate long-term objectives.
These challenges, or short-run programmes, also allow strategy to be adapted incre-
mentally. Strategic intent is a broad vision of where the company wants to be, not a
detailed map of how to get there. Today’s environment is too unpredictable to permit
detailed long-term forecasts of markets, products and technologies. Through evolving
challenges, top management fine-tunes strategy to the emerging opportunities and
realities of the market and technological environment.
Core competences
Without possessing the necessary skills, strategic intent is merely wishful thinking. To
develop products that offer value superior to that of the best international competi-
tors requires an organisation with deep-rooted knowledge and learning ability.
Creating superior value necessitates two sorts of knowledge: first, about what cus-
tomers will value; and second, about the technological skills necessary to provide
such values. The core competences of the organisation are the unique bundle of skills
it possesses that permit it to offer a sustainable competitive advantage.
For example, 3M’s competence was founded originally on sandpaper. Over time it has
built from this a unique bundle of skills in substrates, coatings and adhesives, and
various ways of combining them. These core competences have allowed it to enter
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9736 MMST_C01.QXD 12/5/05 2:44 PM Page 24
and excel in businesses as diverse as ‘Scotch Tape’, ‘Post-it’ notes, magnetic tape, pho-
tographic film, pressure-sensitive tapes and coated abrasives. Casio’s core
competences are in miniaturisation, micro-processor design, material science and
ultra-thin precision casings. These skills allow it to hold leading positions in calcula-
tors, pocket TVs, musical instruments and digital watches. One could envisage Casio
developing miniature products around the convergence of mobile phones, watches,
Personal Digital Assistants (PDAs) and digital media.
In the long run, success depends upon possessing superior core competences in the
fields in which the organisation operates. A company can, of course, look for short
cuts to competitiveness by buying in products and technologies. Dozens of Japanese
companies would be willing to supply computers, copiers or motors on an Original
Equipment Manufacturer (OEM) private label basis. But as markets and technologies
change, or if the supplier decides to enter the market itself, the company’s product
line together with all its investments in marketing and distribution may quickly
become vulnerable. These core skills are hard to acquire because they take time, sacri-
fice and experience to develop.
Core competences provide the foundation for innovation and provide access to a
wide variety of new products and markets. Prahalad and Hamel draw the analogy of a
diversified corporation and a large tree (Figure 1.9). The root system that provides the
nourishment, sustenance and stability is the core competences. One or more of these
roots or core competences are applied in the development of core products. The core
products are the components or sub-assemblies that form the foundation of a myriad
of end products. These end products are usually grouped by the company, in terms of
similarity of their markets, into business units. Returning to the analogy, the trunk
and major limbs are the core products, the smaller branches are the business units
and the leaves are the end products. For example, Honda’s core competences lie in its
specific design and development skills; these are then combined to produce various
core engine products; in turn these lead to a huge and changing array of end prod-
ucts which are grouped into its motorcycle, car, lawnmower and outboard engine
business units. As new market opportunities appear, it can reconfigure its core capa-
bilities to create new business units and end products.
Many companies make the mistake of believing that their core competences lie in
their portfolio of products and business units. But in today’s fast-moving markets,
products and businesses are temporary; the real foundation of the company is in its
portfolio of capabilities.
Top management’s task is to decide what the core capabilities should be. This will
depend upon what skills have been inherited and what vision they have of the evolu-
tion of the firm’s markets. What capabilities will provide the opportunity for market
leadership? Coca-Cola saw distribution as the key – ‘putting a Coke within arm’s
length of every consumer in the world’. NEC saw the convergence of computers and
communications making competences in semiconductors a core capability. Once
decided, developing these core capabilities requires a total organisational commit-
ment and strategic investments far beyond what could be justified by conventional
ROI criteria. Like products, core capabilities are not static, but depend upon continual
learning and adaptation.
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Organisational dimensions
End products
1 2 3 4 5 6 7 8 9 10 11 12
Business Business Business Business

1 2 3 4
Core products
1
Core products
2
Competence Competence Competence Competence

1 2 3 4
Figure 1.9
Competences: the
roots of Source: Reprinted by permission of Harvard Business Review from C.K. Prahalad and Gary Hamel, ‘The core
competence of the corporation’, May–June 1990
competitiveness
Building these shared values and core skills depends upon the efforts of the people in
the organisation, and the strategy, structure and leadership provided by top manage-
ment (Figure 1.10).
People
Creating strategic intent, core competences and competitive advantage depends
totally upon the commitment, skills and initiative of the people who are working in
the organisation. Its people create the value and they are its most important assets.
They should also be seen as appreciating assets, since their worth increases as they
accumulate skills and experience. Unfortunately, too many western companies have
seen employees as costs rather than assets. Personnel policies have been based on
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Customers Competitive
needs offers
Competitive
advantage
Core
competences
Strategic
intent
People
Structure Strategy Systems

Figure 1.10
Organisational Leadership
attributes
containment and control rather than on trust and empowerment. Still influenced by
discredited theories of ‘scientific management’ propagated 60 years ago, workers and
even managers have been given narrowly defined, highly specialised jobs, with close
supervision and disciplined by hierarchy, rules and regulations. The result, for most
of the companies, has been workers and managers who are alienated, insecure and
reluctant to take the initiative.
Structure
The business needs an organisational structure that meets three requirements. It
should encourage people to make a wholehearted contribution, reinforce the devel-
opment of core competences and strategic intent, and permit strategies to be tailored
to defined markets.
Small business units are best for encouraging people to contribute. Small organisa-
tions simulate the advantages of working for a small company: bureaucracy is
minimised, job definitions are broad and flexible, communications are good and
everyone can see how they contribute to meeting the needs of customers. The
information revolution, and particularly the Internet, is having a noticeable impact
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in reducing bureaucracy. Internet technology allows firms to give all their staff access
to the information they need. This cuts the need for hierarchies filtering and control-
ling knowledge. Different business units in a dynamic company would normally be
based upon common core competences. Honda’s car, motorcycle, power tool and
outboard motor businesses, for example, rest upon shared design and development
skills. Innovative businesses will be created out of new and different combinations of
these core competences. If walls are built between units, information is not shared
and people do not transfer between them, an organisation will fail to leverage its
competences and optimise its innovation capability. Completely autonomous busi-
ness units are therefore neither possible nor desirable.
Not only do core capabilities have to be shared within a large organisation, but,
increasingly, strategic alliances require sharing skills across quite separate organis-
ations. Pressures to accelerate innovation, the speed of change in markets and
technology, and the high cost of developing new products and new markets are
encouraging firms to share skills. Co-operative research, product licensing, co-
marketing agreements and joint ventures are all rapidly growing. Again, new infor-
mation technology is facilitating structures that accelerate the organisation’s learning
of new marketing and technical skills.
Finally, structures have to reflect the market orientation. The market and sales teams
have to be geared to markets rather than products or processes. In summary, organisa-
tion structures are always unsatisfactory because they have to meet conflicting
requirements. Shared values and common purpose have to be the glue to make them fly.
Strategy
The business also needs objectives and a strategy to provide direction and to guide the
development of the structure and systems. The objectives should cover all the areas
necessary for the survival of the business. They will cover marketing and financial per-
spectives, and internal and operational measures of efficiency and effectiveness.
The strategy will define the route that the business will seek to achieve these objec-
tives. Strategy centres around decisions about marketing and innovation. The most
important strategic decision is what markets to focus on. Next is the positioning deci-
sion – what competitive advantage should the firm develop to build leadership in
these markets? These decisions then determine the core competences that the busi-
ness needs to accumulate, the product range it will develop and the production and
distribution infrastructures it must create.
Systems
The Internet has revolutionised the systems of firms. Systems refer to how informa-
tion moves around the organisation. Information provides the links between
customers and the business. Systems also share knowledge across business units and
between functional areas. Management needs to provide systems that meet three cri-
teria. First, people require comprehensive information systems that give them a
balanced picture of performance. If senior managers focus only on financial informa-
tion, they will not attend to the marketing and human relations strategies upon
which long-term competitiveness depends. Second, information should be widely
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9736 MMST_C01.QXD 12/5/05 2:44 PM Page 28
accessible. If people from the different functional areas and diverse business units are
to contribute and innovate, they need to be able to access all the information they
require about customers, products and processes. Finally, information needs to be
available fast. Today speed of response is fundamental to competitive advantage, and
systems that provide fast and relevant information are the means to achieve it.
Leadership
The role of top management and, in particular, the chief executive is to provide the
dynamic for organisational effectiveness. The first task is to articulate the vision of
where the organisation is heading. Experience and values will allow the chief execu-
tive to define the areas where the company will compete and the core competences it
must develop. Second, the leader has the crucial task of communicating these values
and strategies to people throughout the organisation. Today’s leader has to be highly
visible, and needs to inspire the workforce with the organisation’s aspirations and
values. Third, the leader needs to be an orchestrator, to create cohesion and direction
from the multitude of talented and opinionated individuals within the company and
stakeholders outside it. This requires organisational and political skills of a high
order. The modern leader is a negotiator and a persuader rather than a dictator.
Summary
Many firms have paid excessive attention to short-term financial performance. This has
eroded international competitiveness and often produced disaffected employees,
customers and other stakeholders. Successful firms understand that survival depends
upon balancing long- and short-term perspectives, and balancing the interests of
shareholders with those of employees and other interest groups.
Ultimately, competitiveness depends upon the business’s ability to satisfy the needs of
customers more effectively than competition. Beating competitors depends upon
developing within the organisation a shared enthusiasm about ‘winning’ or strategic
intent, and the core competences or skills to build superior products. Top management
provides the leadership that motivates people, and develops the strategies, organisation
structure and systems to achieve these capabilities.
Questions
1 Why are profits an inadequate objective for the business?

2 Consider a business you know.
(a) Rank its major objectives in order of importance.
(b) What types of risk does this ordering suggest for the long-term success of the
organisation?
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Notes
3 Should a company have a mission statement? What are its uses?

4 Consider a business with which you are familiar. What are the major environmental
changes that could threaten its survival?
5 Why do so few western companies appear to have a long-term ‘strategic intent’?
6 Why did Sony allow Apple to dominate the first generation of MP3 devices?
Notes
1. Thomas J. Peters and Robert H. Waterman, In Search of Excellence (New York: Harper & Row,
1982); James C. Collins and Jerry I. Porras, Built to Last: Successful habits of visionary
companies (New York: Harper & Row Harper, 1994); Gary Hamel, Leading the Revolution
(Boston, MA: Harvard Business School Press, 2000).
2. Peter Doyle, ‘What are the excellent companies?’, Journal of Marketing Management, April
1992, pp. 101–16.
3. For an excellent review of how major companies employ creative accounting to camouflage
their results, see Terry Smith, Accounting for Growth, 2nd edn (London: Random House,
1996).
4. Collins and Porras, op. cit.
5. Financial Times, ‘Clues that warn of collapse’, 26 May 1991, p. 3. See also C. Pratten,
Company Failure (London: ICA, 1991) for similar evidence.
6 T. Copeland, T. Koller and J. Murrin, Valuation: Measuring and managing the value of
companies, 3rd edn (New York: Wiley, 2000).
7. A comprehensive account of shareholder value applied to marketing strategy is in Peter
Doyle, Value-based Marketing: Marketing strategies for corporate growth and shareholder value
(Chichester: Wiley, 2000).
8. George S. Day and Liam Fahey, ‘Putting strategy into shareholder value analysis’, Harvard
Business Review, March–April 1990, pp. 156–62.
9. Peter Doyle, John Saunders and Veronica Wong, ‘A comparative study of British, US and
Japanese marketing strategies’, Journal of International Business Studies, October 1992,
pp. 157–63.
10. ‘The target CEO in a hostile takeover: can the condemned agent be redeemed’, Long Range
Planning, Duncan Angwin, Philip Stern and S. Bradley, June 2004, pp. 239–57.
11. ‘Learning from Japan – American keiretsu’, Business Week, 27 January 1992, pp. 38–44;
‘Webb of interests’, Business Week, 22 July 1996, pp. 14–16.
12. Adapted from Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating
strategy into action (Boston, MA: Harvard Business School Press, 1996).
13. The following section draws heavily from Gary Hamel and C. K. Prahalad, Competing for the
Future (Boston, MA: Harvard Business School Press, 1996); George Stalk, Philip Evans and
Laurence E. Shulman, ‘Competing on capabilities: the new rules of corporate strategy’,
Harvard Business Review, March–April 1992, pp. 57–69.
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9736 MMST_C02.QXD 12/5/05 2:45 PM Page 31
‘A business has two, and only two,

basic functions: marketing and
innovation. Marketing and
innovation produce results;
all the rest are costs.’
Peter F. Drucker
Chapter 2 THE CUSTOMER-LED BUSINESS
The purpose of a business is to satisfy the needs of its customers. A business that fails
to do this in a competitive economy will not survive because customers will go else-
where. Businesses that are good at satisfying customer needs have the best
opportunities to grow and prosper. Therefore, marketing – the task of creating and
delivering products and services that customers will value – is the central task of
management. Of course, this has also to be done in a way that makes a profit and which
ultimately satisfies the requirements of its other stakeholders, such as employees, cred-
itors and the society in which it operates.
This chapter discusses three issues. First, the theoretical roots of marketing, its key
concepts and standard terminology are presented. These explain the central role that
marketing plays in the efficient running of a competitive economy. Second, the charac-
teristics of the successful customer-led business are shown, and these are contrasted
with those of production and financially led businesses. Finally, a practical, step-by-step
guide to transforming a business into a customer-driven organisation is presented. Only
by achieving such a change are companies likely to become, and remain, internationally
competitive in the coming decade.
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Chapter 2 T h e c u s t o m e r- l e d b u s i n e s s
The theory of marketing
Marketing is largely a pragmatic subject and this book will not focus on academic
theorising. However, there are a number of reasons why it is useful for managers to
have a basic understanding of the core concepts underpinning marketing. First, the
theory provides a common terminology and framework for discussing marketing
problems. Second, it introduces directions for managers to enhance the effectiveness
of their marketing. Finally, it explains the economic and political significance of mar-
keting and how it contributes to the general welfare.
Needs and products

The fundamental idea of marketing is that organisations survive and prosper through
meeting the needs of customers. As Adam Smith showed over 200 years ago, this is
also the justification for free enterprise capitalism as a social and political system.1
Smith showed that the drive of competing firms to make a profit, by providing cus-
tomers with what they want, is ultimately in the interests of consumers because they
obtain more and better products at lower prices. Companies that do this well grow
and prosper; those that do not go under. Marketing management is the task of facili-
tating this process by professionally identifying the needs of customers and
developing those offers that give customers what they want.
Many people would quickly challenge this rationale for marketing and free enter-
prise. Nobody ‘needs’ a McDonald’s hamburger or a Porsche sports car, they would
argue. There are two types of response to this charge. The first is political and con-
cerns individuals’ freedom to buy and sell what they like (subject to it not directly
hurting others). If this freedom is to be restricted, then state officials will determine
what companies may produce and what consumers may buy. This type of state social-
ism has proved to be both economically inefficient and injurious to individual rights.
The second response relates to the nature of human psychology and behaviour. Social
scientists would argue that marketing does not create needs – needs are more basic –
but what marketing can do is influence how these needs are directed.
To see this important point, needs, wants and demands can be distinguished.2 A
need is a basic requirement that an individual wishes to satisfy. People have basic
requirements for food, shelter, affection, esteem and self-development. Freud,
Maslow, Herzberg and other social scientists have shown that these are not created
by marketing, but are determined by human biology and the fundamental nature of
social relationships.
While needs are broad, wants are narrow. A want is a desire for a specific product to
satisfy the underlying need. An individual’s basic food needs could be physically met
for an expenditure of around €10 a week on bread, milk and a few vegetables. This
might be all people need, but, not surprisingly, it is not what they want. The teenager
might want a Big Mac and strawberry shake; the father wants roast beef washed down
with a 1976 Château-Lafitte. In the China of Chairman Mao, the needs of its 1 billion
people for clothes were met by identical plain, cheap cotton suits. But what the
Chinese wanted were Levi jeans, Nike shoes, Lacoste T-shirts and pretty dresses.
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While needs are simple and few, wants are many and sophisticated. Wants are shaped
by social and cultural forces, the media – and the marketing activities of firms.
A demand is a want for a specific product supported by an ability and willingness to
pay for it. Many people want a Porsche, but few are able and willing to buy one.
Companies therefore have not only to make products that people want, but they also
have to make them affordable to a sufficient number. In summary, while companies
do not create the need for food or social status, they do try to influence the demand
by designing their products to be attractive, work well, be affordable and be readily
available. They also try to convey these features through advertising and other com-
munication techniques.
A product is defined as anything that a firm offers to satisfy the needs or wants of cus-
tomers. This can be a physical object such as a soft drink, car or computer, but it can
also be an intangible service such as a haircut, consultancy advice or a holiday. The
main point is that people never buy products for their own sake, but always for the
needs and wants these products satisfy. People do not buy PDAs to look at, but rather
to improve their organisational capabilities. Cosmetics are bought because people
hope they will enhance their looks. In designing and selling physical objects or
intangible services, successful firms concentrate not on the product, but on enhanc-
ing their offer’s ability to satisfy the needs and wants of customers. The key question
is not what products the business makes, but rather which wants it seeks to meet.
Then managers ask how they can redesign their products, augment them with other
physical objects or service benefits, and communicate their offer more effectively so
that they can better meet the needs of target customers.
Value and choice

What do the theoretical constructs tell us about how customers decide among alter-
native offers made by firms? First a customer has a product choice set. This consists of
the number of alternatives that are considered when seeking to satisfy a certain need.
A salesperson in an out-of-town hotel, considering how to meet a need for food, may
have in their product choice set: eating in the hotel restaurant, going out for a ham-
burger, going to a pub, visiting the French restaurant nearby, or buying some snack
food in a shop.
Choice is governed by the consumer’s need set. The consumer might be influenced
by a need for speed, service, convenience, perceived quality, ambience and reliability.
Each of the product alternatives is subjectively weighed by the consumer against the
choice criteria. The one that is rated best is perceived to have the highest utility.
Utility is the consumer’s estimate of the product’s overall capacity to satisfy their
needs. If the price of each of the alternatives were the same, the consumer would
choose the one with the highest utility. But prices are not identical, so that in prac-
tice consumers do not choose the ‘best’ product, they choose the one offering the
most value. Value is a combination of price and utility. While people prefer Porsches,
they buy Fords. Buying the product with the highest utility would require giving up
too many other products. Consequently, there are two ways of stimulating demand
for a company’s product – putting in qualities, features and images that enhance the
utility it offers, or cutting the price.
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Exchange and markets

Societies organise their economies to provide for the needs of their people. An eco-
nomic system has three functions. First, it decides what is to be produced and in
what quantities. Choices have to be made between guns and butter, roads and rail-
ways, Coke and Pepsi. Second, an economy determines how products are produced.
It decides, for example, whether capital and the best brains go into the defence sector
or the advertising industry. The third function of an economy is to determine who
gets the highest incomes and the most products.
Societies have found two main alternatives for deciding these questions: economies
based upon coercion, where the state makes the choices, and economies based upon
exchange, where individual consumers and producers freely decide these questions
through the choices they make. Exchange is the core concept that underlies market-
ing and the free enterprise system. Exchange is defined as the act of obtaining a
desired product from someone by offering something in return. For exchange to take
place there are two important conditions: (1) each party has to have something that
might be of value to the other; and (2) each is free to accept or reject the offer. Then
if the two parties agree on terms of exchange, the exchange process creates value,
since normally both parties are better off than before the exchange. Negotiation is the
process of trying to arrive at a mutually acceptable exchange. When an agreement is
reached, a transaction takes place. A transaction is a trade of values between the two
parties. This may be based upon barter where, for example, one company may offer
its oil in return for another’s machinery. But barter is an inefficient means of
exchange, and money transactions have long dominated the process. Customers
exchange money for goods. In some cases neither money nor goods are traded;
instead the marketer exchanges a product for a behavioural response in terms of
respect, gratitude or political support.
The task of marketing in the exchange process is to seek to understand what the
buyer wants to receive and is willing to pay. The marketer will also have a list of
wants, such as a good price, a long-term contract and quick payment. A transaction
takes place when an exchange is negotiated between the buyer and seller. Successful
businesses prefer to move from transaction marketing to relationship marketing.
Transaction marketing is a one-off negotiation. Here it pays both parties to seek to
maximise their profits. But this changes if the parties are going to have a continuing
relationship. Relationship marketing is a long-term, continuous series of transactions
between parties. This occurs when each trusts the other to deal fairly, reliably and
helpfully. When a good working relationship is built, negotiating time and costs are
reduced and the pattern of transactions becomes more predictable and secure.
As discussed later in this chapter, relationship marketing or creating customer loyalty
is becoming the central focus of marketing. Managers are realising that taking a
short-run profit-maximising approach to customers does not pay off in the longer
run. It pays to invest in quality, customer service and keeping existing customers
happy. Satisfied customers – those who stay with the business over the years – tend to
be much more profitable than new customers. First, this is because the firm does not
have to incur the selling costs of acquiring new ones. Second, satisfied customers
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9736 MMST_C02.QXD 12/5/05 2:45 PM Page 35
place more business with the firm, recommend it to others, and are less price sensi-
tive. Studies by management consultants Bain & Company suggest that the annual
profits generated from a customer who has been with a company for seven years are
typically more than five times the amount it generates in the first year. Customers
with a long-term relationship with a company are much more profitable than newly
acquired ones.
In recent years, organisations have seen the advantage of generalising relationship
marketing to creating marketing networks. A marketing network consists of the com-
pany and those other organisations (suppliers, bankers, distributors, key customers)
with which it has built long-term, dependable relationships. The Japanese keiretsu are
an example of a marketing network. These longer-term partnerships seek to replace
short-term adversarial relationships with co-operation based upon mutual trust, self-
interest and commitment. While in the short run the company might buy cheaper
through opportunistic sourcing, in the longer run it gains through forging a partner-
ship where all parties commit to lowering costs, creating new products and
developing systems that build competitiveness and market leadership. 3
Exchange leads to the concept of a market. The creation of wealth leads to the divi-
sion of labour – people are more efficient when they specialise in the production of
one or a limited selection of products. This permits the development of expertise and
economies of scale. Specialisation creates the need for markets where specialised out-
puts can be exchanged (using money as the medium of exchange). The fields of
economics and marketing define markets rather differently. For an economist, a
market is a collection of both buyers and sellers who transact particular products. In
marketing, however, the collection of sellers is termed the industry and the buyers are
the market. A market is defined as all potential customers sharing a specific need or
want who might be willing and able to exchange to satisfy that need or want.4 Figure
2.1 illustrates how markets and industry interact. Sellers seek information about the
needs and wants of potential customers, then develop, offer and communicate the
benefits of their products to the market. If potential customers buy, then money is
exchanged for the products.
In the modern free enterprise economy, there are literally millions of markets – mar-
kets for raw materials, components, labour, consumer goods, industrial products,
money, distribution services and so on. All are linked together through the exchange
process whereby parties freely trade products and services for money. In some mar-
kets buyers and sellers meet personally, but increasingly these processes take place
over the Internet.
Information
Goods
Market Industry
(customers) Money (firms)
Figure 2.1 Communication
The market and
industry interact
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Markets and capitalism

Capitalism is based upon markets: buyers and sellers freely negotiating terms of
exchange. As an economic system, capitalism has proved superior to state control or
socialism in three respects. First, it is consistent with individual freedom. If the state
appropriates the right to decide what shall be produced and what prices will rule, it
also must appropriate the rights to determine what occupations people will under-
take, what they may earn and what they can do with their money. Economic
freedom appears to be a necessary (though not sufficient) condition for political
freedom.5
Second, empirically it has proved to be more efficient in allocating resources and
increasing the aggregate wealth of societies. In a free enterprise system, the millions
of prices are determined by the individual choices of consumers and producers. If too
little of a product is produced, prices will rise. In the short term this efficiently
rations the product to those consumers who most desire it and have the means to
pay for it. In the long term, the higher prices encourage suppliers to boost production
and overcome the shortage. Conversely, if too much of a product is produced, prices
fall, stimulating demand and subsequently encouraging a curtailing of production
and a switch of resources to more profitable products. Under socialism, prices do not
reflect supply and demand so that queues and shortages are endemic in some areas,
while gluts of unwanted products occur in others.
Third, capitalism encourages growth and innovation. Entrepreneurs receive big
rewards for providing customers with better solutions to their needs and wants, and
the economic system permits capital and skills to be rapidly transferred into these
activities. By contrast, socialism provides no automatic incentives for satisfying cus-
tomers and constricts the shift of resources into new areas.
While capitalism has worked better than socialism, it is not without its faults. There
are four important weaknesses. First, its advantages break down if there is not strong
competition between buyers and between sellers. Under monopoly, the price mecha-
nism and exchange process do not operate efficiently to allocate resources and
stimulate innovation. Second, because economic decisions are based upon changing
expectations of benefit and profit, capitalism is economically unstable. There tend to
be unpredictable cycles of boom and bust. Third, it leads to incomes that are very
unequal. The most successful individuals can earn enormous incomes, while those
who are ungifted or unlucky are unprotected. Finally, capitalism produces ‘externali-
ties’ that can damage people who are not parties to the transactions. Thus a
successful factory can earn high profits but pollute the neighbouring environment.
These external costs are borne by others and there is no incentive for the producer to
curtail such damaging externalities.
Consequently, even in the most capitalistic of economies the state must play a role.
Its functions lie in encouraging competition, seeking to maintain economic stability,
protecting the weak and underprivileged, protecting the environment from the ’self-
ish’ concerns of producers and consumers, and undertaking those social tasks where
the profit motive is inadequate.
Having completed the review of these important theoretical underpinnings, the con-
cept of marketing can usefully be defined as follows:
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T h e c u s t o m e r- l e d b u s i n e s s
Marketing is a social and managerial process by which individuals and groups obtain what
they need and want through creating, offering and exchanging products of value with others.6
The customer-led business
The significance of marketing follows directly from the theory of exchange and mar-
kets. The task of marketing is to facilitate the exchange process and enhance the
organisation’s ability to engage in mutually beneficial exchanges with customers.
Marketing management seeks to attract and retain customers by offering them desir-
able products. This way the organisation obtains the resources to meet the
expectations of its own stakeholders – shareholders, employees and the community.
Marketing management consists of five tasks:
■ Identifying target markets. Management has to identify those customers it desires to

make exchanges with. Choice of target markets will be governed by the wealth
they possess and the organisation’s capability to serve them.
■ Marketing research. Management has to collect information on the current and
potential needs of customers in the markets chosen, how they buy and what com-
petitors are offering.
■ Product development. The business must develop products (and/or services) which
will meet needs and wants sufficiently to attract target customers to buy.
■ Marketing mix. Management will then have to determine the price, promotion and
distribution for the product. This marketing mix is tailored to offer value to cus-
tomers, to communicate the offer and to make it accessible and convenient.
■ Monitoring. Since management will wish to build relationships which retain customers,
it needs to obtain feedback on customer satisfaction with the exchange and to modify
the product and marketing mix as needs and competitive environments change.
Marketing management can be defined as the process of identifying target markets,

researching the needs of customers in these markets and then developing the prod-
uct, price, promotion and distribution to create exchanges that satisfy the objectives
of the organisation’s stakeholders. Implicit in this definition is competitiveness.
Customers have choices – normally there will be several competitors seeking to
attract them – so the organisation’s ability to meet its objectives requires it to offer
superior value to competition.
In economies based upon competition and free exchange, successful organisations
must put the customer first. This obvious notion, however, has not been universally
taken up. Many organisations operate under quite different philosophies. We will
now look at four of the most common alternatives.
Production orientation
Some companies give primacy to their product rather than to the customer. There are
two distinct variants of this philosophy. In high-tech companies, in particular, there
is often a belief that developing technologically superior products is the route to
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success. Here scientists make the product decisions. Little or no effort is made in
researching whether the customer will want the features being developed, find the
product attractive or be willing to pay for it. Generally the results are offers that are
over-engineered, too costly to produce and insufficiently appealing to the market.
A second variant of the production concept is the view that success lies in producing
the product more efficiently than competitors. Possessing the lowest cost is seen as
the source of competitive advantage. Henry Ford epitomised this philosophy with his
response to customers looking for novelty: ‘They can have any colour of car they like
– so long as it’s black!’ As Ford discovered, in affluent and rapidly changing markets
an internal focus on production risks marooning the organisation in the backwaters
of low value-added products and declining markets.
Sales orientation
Production-oriented businesses often eventually make the transition to a sales orien-
tation. Having produced products that are unappealing to customers, they see
aggressive selling, advertising and sales promotion as the means to penetrate the
market. But selling is not marketing – in fact, it can be just the opposite. As Levitt put
it in his famous ‘Marketing myopia’ article:
Selling tries to get the customer to want what the company has, marketing on the other
hand, tries to get the company to produce what the customer wants.7
Another guru, Peter Drucker, put it equally clearly:
Selling and marketing are antithetical rather than synonymous or even complementary.
There will always, one can assume, be a need for some selling. But the aim of marketing
is to make selling superfluous. The aim of marketing is to know and understand the
customer so well that the product or service fits him and sells itself.8
While aggressive selling can sometimes fool the customer into buying a product
once, it can never form the basis of a long-term relationship.
Financial orientation
Many companies today are neither product nor customer oriented, but instead focus
on their financial assets. They see the task of management as generating the maximum
amount of cash that can be produced from a given asset base. As the chief executive of
Tomkins, one of these financially focused companies, explained: ‘We regard our cus-
tomers as the financial institutions, not the people who buy our company’s products.
We are in the business of buying companies rather than running them.’
Such companies can achieve high returns for a few years by exploiting the assets they
inherit. But in the longer run they fail to satisfy customers, to build strong brands
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T h e c u s t o m e r- l e d b u s i n e s s
and to keep up with the changing marketing and technological environment. The
originator of the above quote was forced to resign in October 2000.
Customer orientation
Today top companies recognise the primacy of being customer led. This business ori-
entation is generally called the marketing concept.
The marketing concept states that a business is most likely to achieve its goals when it organ-
ises itself to meet the current and potential needs of customers more effectively than competitors.
Figure 2.2 contrasts marketing orientation with production and sales orientations. The
last two ’sell what they make’. The customer orientation, on the other hand, works
back from an appraisal of what customers want to how production and resources can
be organised to meet these wants. Ford has tried to implement a customer orientation
through both brand and product development.
Production orientation
Production Manufacture
Customer
capabilities products
Selling orientation
Aim at
Production Manufacture Aggressive
customer
capabilities products sales effort
target
Marketing orientation
Actual and Production

potential Potential capabilities Market
customer market products Customer
wants and opportunity Marketing and services
needs programme
Figure 2.2
Production, sales
and marketing Feedback
orientations
The rest of the chapter explores the key elements of the marketing concept defined
above – business goals, meeting customer needs, organisation and competitiveness.
The five central components of the customer orientation are shown in Figure 2.3. At
the centre is the focus on customer needs. Creating this focus requires organisational
change and competitive advantage. At the top is the result – organisational success –
that is derived from the effective customer focus.
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Organisational
success
Entire Customer Right-side-up

organisation needs organisation
Competitive
advantage
Figure 2.3
The components of
a customer
orientation
Success
The first component of the definition of the marketing concept is that it is about suc-
cessfully meeting the goals of the organisation.
All businesses have a range of financial and other stakeholder goals. The difference
between a customer-led business and a financially led one is that the customer-led
one sees profit as the result of successfully meeting customer needs. If a company
does not attract and retain customers, it will not have a profitable business for long.
Marketing – satisfying customer needs – is the central purpose of any business. Profit,
growth and stability all depend upon management’s ability to orient the organisation
to meeting the needs of customers.
Success and customer satisfaction

Managers make a mistake when they gauge their company’s performance on the basis
of its current profit and sales performance. Profits today are derived from customers
won in the past. Good profits today can temporarily mask sharply deteriorating cus-
tomer performance. Similarly, sales growth may not lead to future profits if the new
customers cost too much to attract or have no loyalty to the company. By looking at
profits and sales alone, executives may only become aware of problems when sales
and profits begin to fall away, and by then it is often too late.
Value – and tomorrow’s sales and profits – are created by today’s satisfied customers
who want to continue doing business with the company. In the last few years there
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Success
has been a lot of research into the value of satisfied customers and into what deter-
mines customer satisfaction (see Box 2.1). Today’s top companies recognise that
satisfied customers are highly valued assets. In contrast, dissatisfied customers can
rapidly destroy the performance of the business.
A customer-led company recognises that its only true assets are satisfied customers.
Without satisfied customers the balance sheet’s assets are merely scrap. The notion of
customers as assets is not a philosophical point, but a hard, economic one.
Companies can actually measure the lifetime value of customers (LVC) and estimate
the potential revenues they will generate. The results can be staggering and should
open the eyes of management to the profit implications of being customer led.
A supermarket group, for example, can estimate that an average UK family will spend
€100 a week on groceries, or around €5,000 a year. This amounts to a lifetime expendi-
ture of about €150,000 per family. Ford knows that a family’s lifetime expenditure on
cars could be around €300,000. But a good customer is worth more than this to Tesco
or Ford since a satisfied buyer tells on average another three to five other customers
about the company. Thus the customer may be worth up to €1 million potential life-
time revenue to the business. Satisfied customers are appreciating assets of great value.
By contrast, when a customer becomes dissatisfied with the quality of the firm’s prod-
ucts or services, profitability can unravel very fast. Not only is the dissatisfied customer
lost, but, on average, studies suggest that they tell 14 others about the poor service.9
Box 2.1 The ABC of customer loyalty

■ Loyal customers are assets. A customer that generates a profit of €1,000 for a supplier in its first year
is likely to generate a total profit of €50,000 if retained as a satisfied customer over ten years.
■ Loyal customers are more profitable. They buy more of the company’s products, take less of its time,
are less sensitive to price and bring in new customers.
■ Winning new customers is costly. It costs 3–5 times as much to find a new customer as to retain an
existing one. These are the costs of researching, advertising, selling and negotiating with new prospects.
■ Increasing customer retention pays dividends. The average company loses 10 per cent of its
customers annually. Studies show that increasing retention by as little as 5 per cent can increase a
company’s profits by 85 per cent.
■ ‘Highly satisfied’ customers repurchase. They are six times more likely to repurchase than customers
who rate themselves just ’satisfied’. Highly satisfied customers tell others about the company.
■ Dissatisfied customers tell others. On average they tell 14 others. So if losing a single customer
represents the loss of an asset with a lifetime value of say €10,000, this might be only the tip of the
iceberg. The total value lost might be 14 times as great.
■ Most dissatisfied customers don’t complain. While they tell their associates, only 4 per cent bother to
complain to the company. For every complaint received, another 26 are likely to have problems and 6
will be serious ones.
■ Satisfactory resolution of complaints increases loyalty. When complaints are resolved satisfactorily,
these customers tend to be more loyal than those who never experienced a problem in the first place.
■ Few customers defect due to poor product performance. Only 14 per cent defect for this reason. Two-
thirds leave because they find service people indifferent or inaccessible.
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Consequently, it is crucial to measure customer satisfaction. Profits measure the results

of past performance; customer satisfaction indicates what tomorrow’s profits will be.
Focus on needs
The core idea of the customer-led company is that it focuses on needs not products.
The central idea of marketing is the recognition that whatever product the company
produces, the customer does not want it. The customer wants to meet a need, not
purchase a product. This recognition is fundamental to the way the business defines
and researches its markets, develops and prices its product range, communicates to its
customers and organises its employees.
A market is defined by a need not a product. Most managers, when asked what market
they are in, respond by naming a product. We are in ‘the cosmetics market’ or ‘com-
puters’ or ‘the watch business’. But customers do not want cosmetics, computers or
watches; they want to meet certain needs and seek products or services to satisfy
them. A market is a group of potential customers with similar needs. IBM carved out a
leadership position by defining its market, not as computers, but as managers wanting
better information to make more profitable decisions. Buyers were much more ready
to spend on better information systems than they were on computers. Scandinavian
Airlines (SAS), under Jan Carlzon, carefully redefined itself as meeting the travel needs
of business people rather than being in airlines, and while this strategy initially proved
a success, the company has been forced to respond to the competition of low-cost air-
lines by introducing a service for ‘cost-conscious’ business travellers.10 Charles Revson,
founder of Revlon, put it more colourfully when he remarked: ‘In the factory we make
cosmetics, but in the store we sell hope.’ Rolex defined itself as being in the status not
watches business. The president of Black & Decker made a similar point: ‘Last year one
million quarter-inch drills were sold, not because people wanted quarter-inch drills,
but because they wanted quarter-inch holes.’
Once a company has defined its market in terms of customers, it must thoroughly
research their needs. Often services are considered as important as the core product.
When British Airways commenced its programme of customer research, it anticipated
that the key requirements would be safety, on-time arrivals and schedule conven-
ience. It was surprised to find four, rather secondary, factors valued most by
customers:
■ Care and concern on the part of the staff that meet the customers.
■ Problem-solving capabilities of front-line personnel.
■ Flexibility in the interpretation of policies and procedures.
■ Recovery, or the ability of front-line people to make things right for the customer
when they had somehow gone astray.
Increasingly, organisations in the public sector discover such findings. A National

Health Service hospital recently surveyed its patients to determine the level of cus-
tomer satisfaction. It discovered that patients rated clinical quality only fourteenth in
their list of priorities. The top three concerns were length of wait, staff friendliness
and physical surroundings.
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Fo c u s o n n e e d s
The reason why such factors are rated so highly is that customer expectations are pro-
gressive. Once they have grown used to a benefit, it ceases to be a competitive
discriminator. Customers expect all products and services to be safe and reliable –
choice is now based on the additional features and services that competitors offer.
The tasks are to determine what benefits are most valued and then to train and moti-
vate staff to provide them and to monitor ongoing performance against these criteria.
Once the customer’s needs are known, the company can then develop the range of
products and services to meet them. It is useful to distinguish between the core prod-
uct or service and the augmented or secondary products or services that surround the
core. For a hotel, the core product is clean, comfortable accommodation. But since
many hotels can meet this minimum requirement, differentiation and choice are
based upon how effectively the hotel augments its core. Augmented products include
personal service, restaurant, television, leisure facilities and so on. Airlines and hospi-
tals find, not surprisingly, that they are being judged not by their core products, but
by the quality of their augmented services.
Meeting needs also generates higher margins than selling products. If a salesperson
tries to interest a customer in a €40,000 machine tool, the customer invariably per-
ceives additional costs. The marketing approach is to focus on benefits not on
products and costs. If the new machine saved €200,000 on labour, parts, material and
power over its lifetime, the salesperson could demonstrate that the buyer would
increase net company profits by €160,000.
Since successful marketing rates knowledge of the customer more highly than knowl-
edge of the product, it often requires significant organisational changes. In the past,
companies have often organised their businesses and sales along product lines; today
they increasingly organise around markets. Rather than specialise in a specific prod-
uct, they focus on a particular type of customer. This way they get to know the
customer’s business and needs, and can search with the customer for ways of enhanc-
ing performance.
The greatest opportunities lie in meeting needs that have not been met by competi-
tors. Three types of need – or market – can be distinguished. Existing markets are
those where customers are satisfied with existing products. When newcomers enter,
they compete on price and promotion rather than offering new benefits. These mar-
kets approach commodity-like competition, margins are low and there are few
differences between products.
Latent markets consist of customers with defined needs that have not yet been met
by competitors. A company that develops a product or service to meet these needs
has the opportunity, because of the absence of competition, to obtain a unique
market position. These products may represent significant improvements over previ-
ous ones. For example, the personal computer was a breakthrough in the 1960s,
video in the 1970s, the car telephone in the 1980s and Internet browsers in the
1990s. There are lots of unmet needs. Pharmaceutical companies are looking for
cures for cancer, AIDS and the common cold. Car manufacturers want to find
engines that do not pollute and are more economical in fuel. Computer companies
want speech-recognition technology.
The third are incipient markets. These are needs that customers have – but do not
know they have until a product or service appears which triggers their recognition
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of certain needs or wants. Such markets appear more frequently than managers
imagine. Customers are not professional innovators and, not surprisingly, are often
myopic in imagining new solutions to their problems. High rates of technological
change, in particular, make it difficult for customers to foresee the benefits that can
be offered. Market research, therefore, often produces poor projections of the oppor-
tunities that new products represent. Examples of products meeting incipient needs
are 3M’s Post-it notes, the Sony Walkman, the Xerox machine, eBay and iTunes.
These products and services changed customer behaviour and created new markets
when none previously existed.
Innovation – meeting latent or incipient needs, offers real opportunities for profit.
Being customer led means being an innovator (see Box 2.2). There are few opportuni-
ties for profit in producing me-too products in existing markets. Growth and
profitability come from identifying and meeting customer needs that have not yet
been met. Without continuous improvement – finding new and better ways of satis-
fying customer needs – profit margins will be under constant pressure. Customers
expect prices to fall in real terms when products do not change, and competition
normally ensures that this occurs. In the long run, no amount of efficiency improve-
ment can compensate for a lack of customer focus and innovative thrust.
One company that has been innovative in satisfying previously unmet customer
needs is eBay, which manages to match buyers and sellers in new ways, such as elec-
tronic auctions. The range of products now sold via eBay in many countries is huge
and includes luxury items such as Rolex watches.
Box 2.2 Customer needs and innovation

Federal Express and Milliken are two examples of companies that succeed through continuously generating
innovative solutions to customer needs.
Fed Ex’s customer satisfaction surveys showed that it provided excellent service, but it recently decided that
it must do even better. It examined the entire package delivery and billing process from the customers’
viewpoint. The result was Powership – a computer terminal given to thousands of the company’s best
customers. It creates address labels with routing instructions, and automatic billing that hits the screen
when the package arrives. Fed Ex built more growth and increased customer loyalty and satisfaction by
utilising modern information technology and by understanding customer needs better than customers did
themselves.
Milliken, a leading textile manufacturer, sought new ways to provide value to its retail customers. Its
customer taskforce found to its surprise that the biggest problem that retailers faced was not the cost of
the items, but the cost of too many wrong items left unsold at the end of the season. Milliken’s response
was to drop its traditional once-per-season ordering system and allow retailers to make ‘mid-flight course
corrections’ in a series of separate reorder stages throughout the season. To make this work, the company
had then to re-engineer all its manufacturing and information processes to take out time and waste. The
result was again higher customer loyalty, growth and secured margins.
Source: Boston Consulting Group
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Organisation
Organisation
This is the third component of the marketing concept. Since marketing is what the
business is all about, it has to be a central concern to all in the organisation. That
front-line staff have to be customer led is clear, but the marketing focus leads to a
radical reassessment of the tasks and responsibilities of non-front-line personnel –
those who serve in supervisory, middle and senior management ranks.
Moments of truth
Jan Carlzon’s turnaround of Scandinavian Airlines was based upon focusing on what
he termed the ‘moments of truth’. He realised that customers prefer those suppliers
who have an image for quality and service. Customers build up this image through
the quality of their personal contacts with the company’s products and staff. Each
time the customer meets one of the company’s salespeople, service staff, agents or
attendants, there is a ‘moment of truth’ where the customer can be won or lost by
the quality of the service and personal contact received. To the customer the front-
line staff are the company. In this sense a company is as good as its weakest
employee. If at a moment of truth the company’s representative responds inade-
quately, the customer does not say the representative does not care, but ‘the
company does not care’.
The right-side-up organisation

Consequently, front-line staff determine how customers perceive the organisation.
They need to be the most customer-oriented, best-trained and most highly motivated
employees in the organisation. Unfortunately, in many organisations the opposite is
closer to the truth. This is illustrated in Figure 2.4. At the top of the figure is the hier-
archical pyramid structure that still characterises many organisations. At the base of
this pyramid are the front-line personnel. Above them are the ranks of supervisors,
middle managers and experts who control, co-ordinate and direct the front line.
Today such traditional organisations are under pressure as never before. Three prob-
lems are crumbling these edifices. First, they result in excessive overhead costs:
competitive pressures mean that few companies can afford to employ five to ten
people to back up one front-line worker. Second, these organisations are too slow:
customer requirements are not solved immediately by the front line, but instead have
to be passed upwards to co-ordinators and staff for study, consultation and decision.
In an age of shortening product life cycles, such delays can be crippling. Finally, the
lack of discretion and inferior status ascribed to front-line staff demotivates them and
alienates them from both the company and its customers.
Today’s leading companies are attempting to change dramatically by turning this pyra-
mid upside down and flattening it (see the example of Pepsi Cola in Figure 2.5). By
flattening it, they aim to take out layers of management and so slash overhead costs.
By turning it upside down, they seek to create a customer-led business with front-line
employees motivated and empowered to satisfy customers. These new organisations
recognise first that everything should start from a customer perspective. Second, those
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9736 MMST_C02.QXD 12/5/05 2:45 PM Page 46
Wrong side up
Top
Middle management
Front-line people
Customers
Right side up
Customers
Front-line people
Cu
s
Middle management
er
st
om
om
st
er
Top
Cu
s
Figure 2.4
Wrong- and right-
side-up
organisations
employees closest to the customer are at the top of the organisation. They should be
empowered to exercise their freedom to act within their areas of competence – take
responsibility, accept accountability, exercise initiative and deliver results. As far as
possible they should see themselves as owner-operators, recognising that what is
good for the customer is good for the company and good for them as individuals.
Third, these companies see the primary role of staff, middle and senior management
as helping the front line by providing the right products and resources and
removing obstacles.
Measuring the performance of front-line staff in satisfying customers is normally
fairly easy. Subjective impressions can be gained from customer complaints, from
talking to customers, retailers and wholesalers, and from staff meetings. More com-
prehensive and objective measures can be obtained from formal customer surveys
that poll customers about the quality of the product or service and the relationship
they have with the company and its staff. This way front line people learn whether
they are doing a good job and where the problems are.
But how is the performance of non-front line personnel evaluated? Since their task is
to support the front line, the answer is clear – ask the front line. Those outside the
front line need to be evaluated and rewarded on the basis of systematic feedback
from their front line on the quality of the support they provide and the relationships
they establish with them. When this is done, the company makes dramatic progress
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Competitive advantage
We will be an outstanding company by exceeding customer expectations

through empowered people, guided by shared values
This requires
A consistent
customer focus
for our company which all of our people understand and feel passionate about
An
empowered organisation
which is both motivated and supported to satisfy customers to the fullest
extent of their capabilities
A set of
shared values
which guides all of our decisions and actions
To make this a reality, we must turn the company ‘right side up’. A ‘right-side-
up’ company places the customer (anyone who buys or sells our product) at
the top, thereby acknowledging everything starts with the customer.
Those employees closest to the customers are at the top of the organisation.
They must be empowered to satisfy customer needs. The rest of the
Figure 2.5 organisation’s role is to help those closest to the customers by providing
Pepsi Cola: the resources and removing obstacles.
right-side-up
company
in being customer driven and empowering the front line. Middle management and
staff positions cease to be hideaways for highly paid people who do not add value to
the performance of the front line. Middle managers are incentivised to ask ‘What can
we do for the front line?’ and so indirectly, ‘What can we do for the customer?’
Competitive advantage
The fourth aspect of the marketing concept is competitiveness. The marketing con-
cept requires more than being able to meet customer needs – it requires meeting
them better than competitors. Customers choose those suppliers that offer the best
value. If a company does not have a competitive advantage, it will lose market share
or have to cut prices and profit margins to retain it. In the 1990s, Swissair ceased to
be the businessperson’s favourite airline, not because it got worse, but because the
competitors such as British Airways and Singapore Airlines improved and then sur-
passed it in service.
It follows that companies must not only systematically monitor the level of customer
satisfaction with their business, but also measure this against competitors. Competitive
benchmarking compares customer satisfaction with the products, services and relation-
ships of the company with those of key competitors. Competitive benchmarking
involves five steps:
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1 Determine the critical success factors. Market research should identify the dimen-
sions of quality and service most valued by customers.
2 Measure how customers perceive the business along these critical success factors.
3 Measure how customers perceive key competitors along these factors.
4 Measure the performance gap. How does the business compare with the best com-
petitors? What are the strengths and weaknesses?
5 Produce action plans. Project teams need to be created to analyse the problem and
determine how the gap can be closed.
Competitive benchmarking is important. It encourages management to focus exter-

nally on the customer and the competition. It destroys complacency and creates a
sense of urgency. It should get everyone in the business involved and committed to a
series of specific action targets providing for continuing improvement.
Entire business
Finally, many managers make the mistake of thinking that becoming marketing ori-
ented means making the marketing department the primary function in the business.
But this is definitely not so. Marketing is a philosophy of business that places the cus-
tomer, not the marketing department, at the centre. The marketing philosophy says
that everyone’s role is to focus on satisfying the customer. To avoid it being seen as a
narrow, functional task, some outstanding companies actually refuse to have a mar-
keting department. They believe that the central task of all personnel – operating,
distribution staff, buyers and technical people – is to satisfy the customer. In the
words of David Packard, co-founder of Hewlett-Packard: ‘Marketing is too important
to leave to the marketing department.’ Peter Drucker explained it comprehensively:
Marketing is so basic that it cannot be considered a separate function within the

business, on a par with others such as manufacturing or personnel. Marketing requires
separate work and a distinct group of activities. But it is first, a central dimension of the
entire business. It is the whole business seen from the point of view of its final result,
that is, from the customer’s point of view. Concern and responsibility must therefore
permeate all areas of the enterprise.11
The marketing department can play a useful role in a company as a facilitator and as
a source of information and advice. But in most companies the really important ‘mar-
keting’ decisions are crucially dependent on the work of other departments. Research
and development often leads in developing new products; engineering and manufac-
turing determine product quality; distribution and service often report to operations.
Marketing departments frequently control only the visible ‘trappings’ of marketing –
advertising, promotions and packaging. Too many managers see these manifestations
as the content of marketing. Real marketing depends upon cross-functional co-
operation. This needs to be based on a deep understanding of and enthusiastic drive
to being customer led throughout the entire business. Training and development in
marketing thinking has to be company wide.
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Customers as assets
Customers as assets
Loyal customers are assets (refer back to Box 2.1). Studies by consultants Bain &
Company tried to measure the value of a loyal customer. If managers know the cost
of losing a customer, they can evaluate the likely pay-off of investments designed to
keep customers happy. For example, a customer that generates a profit of €1,000 for a
supplier in its first year is likely to generate a total profit of €50,000 if retained as a
satisfied customer over ten years. The Bain customer retention model (Figure 2.6)
summarises the typical pattern, demonstrating clearly the profitability of long-term
customer relationships:
■ The cost of acquiring new customers can be substantial. A higher retention rate
implies that fewer customers need to be acquired, so less marketing expenditure
needs to be allocated to targeting potential customers.
■ Loyal customers tend to spend more.
■ Regular customers tend to place frequent, consistent orders and, therefore, usually
cost less to serve.
■ Satisfied customers are the best advertisement for any business and are more likely to
introduce new customers to the company through word-of-mouth recommendation.
■ Satisfied customers are often willing to pay premium prices to a supplier they
know and trust.
■ Retaining customers makes gaining market entry or share gain difficult for competitors.
■ The information collated and held on loyal customers through database manage-
ment allows the company to communicate regularly with them.
Price premium
Referrals
Annual customer profit
Cost savings
Revenue growth
Base profit
Acquisition cost
0 1 2 3 4 5 6 7
Year
Figure 2.6
Why loyal customers Source: Reprinted by permission of Harvard Business School Press from Fredrick F. Reichheld, The Loyalty Effect: the
hidden forces behind growth, profits and lasting value (Boston, MA, 1996).
are more profitable
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Retention and satisfaction

The average company loses around 10 per cent of its customers annually. Bain’s expe-
rience in the UK and the USA is that a 5 per cent increase in the retention rate
increases customer profits by between 20 and 85 per cent. Figure 2.7 suggests how
this varies across different types of industry.
For the ongoing business, retaining customers is more important than creating a cul-
ture of ‘closing the sale’. The key to raising the retention rate is creating highly
satisfied customers. Studies show that customers who rate themselves ‘highly satis-
fied’ are six times more likely to buy again from the company than those who are
just ‘satisfied’ (see Box 2.1). In other words, the relationship seems non-linear.
Creating satisfied customers is not enough – customers rating themselves ’satisfied’
are still often tempted away by competitors. Really to lock customers in, they have to
be ‘highly satisfied’ or ‘delighted’ by the company’s service. Such customers also tell
others. Virgin Atlantic discovered that on average passengers who were delighted by
their experience on its flights told four others. Delighting customers, then, both
increases retention and generates new business.
100%
95
Increase in customer net present value
90
80 84 85 85
81
75
60
50
40 45 45
40
35
20
0
y
nce
sits
ice
ge
tion
ndr y
t
rd
ing
e
men
c
ranc
war
it ca
gen
kera
ser v
lish
sura
epo
tribu
l lau
Soft
age
nsu
ng a
Cred
Pub
l bro
nk d
Auto
in
l dis
stria
man
i
r tisi
me
Life
stria
h ba
stria
Indu
/ho
ing
e
Adv
Indu
c
uild
Indu
Bran
Auto
ce b
Figure 2.7
Impact of a 5-
Of fi
percentage-point Industry
increase in retention
rate on customer Source: Reprinted by permission of Harvard Business School Press from Fredrick F. Reichheld, The Loyalty Effect:
The hidden forces behind growth, profits and lasting value (Boston, MA, 1996).
net present value
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Customers as assets
If satisfied customers build profits, dissatisfied ones can erode them even quicker.
Dissatisfied customers tell on average 14 other people. So if losing a single customer
represents the loss of an asset with a lifetime value of €50,000, this might be only the
tip of the iceberg. The total value could be many times greater. Managers greatly
underestimate the cost of dissatisfied customers. They think customers are happy
because they get few complaints. But research suggests that only 4 per cent of dissat-
isfied customers complain. So for every complaint received there are likely to be 26
other dissatisfied customers, of whom 6 will have serious problems. For suppliers
using third-party channels, the results are even more worrying, since it has been esti-
mated that only 2 per cent of complaints made are actually received by the
manufacturer. The rest are made to retailers, brokers or distributors. Dissatisfied cus-
tomers can be rapidly eroding the value of the business without managers being
aware of the problems.
Consequently, it is crucial systematically and continuously to measure customer satis-
faction. It is also necessary to study dissatisfied customers and explore why customers
have defected. Dissatisfied customers should be encouraged to complain. Not only
does this indicate the problems, but it also offers the company the opportunity to
rectify them. This can be a powerful way of improving the retention rate. Studies sug-
gest that the company can retain an average of 62 per cent of dissatisfied customers if
it responds to their complaints. If it responds very quickly, it can hold on to 95 per
cent of these customers. British Airways, which has made major efforts in this area,
found an even more striking pattern. It found that customers whose complaints are
dealt with to the customer’s complete satisfaction are 5–10 per cent more satisfied
with the airline than those who have never had a problem.
Managerial implications
A company’s future sales and profit depend upon its ability to forge successful long-
term customer relationships. The basis of creating such loyalty is the company’s
ability to satisfy customers better than competitors. The first task of managers is to
measure systematically and continually whether it is doing this. The second task is to
put in place strategies to improve customer satisfaction. Executives do this by devel-
oping policies that deliver high value. This is achieved by offering products and
services that are perceived by target customers as consistently superior or lower in
cost, or both.
Superior value is based upon the company building core competences – specific
knowledge and skills, which allow it to manage core processes more effectively than
competition. The fundamental core processes centre around developing new products,
managing operations and servicing customers. The value of the company’s offer also
needs to be communicated to target customers through brand-building programmes,
which include advertising, the Internet, public relations, sponsorship programmes and
guarantees. In recent years, reflecting the increased attention to retaining key cus-
tomers, companies have introduced a range of loyalty programmes. These include
frequency marketing programmes, such as those run by airlines, which reward cus-
tomers who buy frequently. Another type of loyalty programme is the club concept,
which offers customers who join special benefits such as discounts, interest magazines,
newsletters or gifts. The Japanese video game company Nintendo enrolled over
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2 million children in its Nintendo Club. Tesco, the British grocery retailer, enrolled
over 1 million members in the first six months when it launched its Club Card. The
Internet and telephone help lines have been another rapidly growing medium to
permit better communication between customer and company. In the USA, almost all
consumer goods companies carry freephone ‘care line’ numbers and web-site details.
Procter & Gamble prints a free telephone number on all its products and deals with
75,000 customers’ calls a year. If 85 per cent of the complaints are handled to its cus-
tomers’ satisfaction, the benefit to the company annually was conservatively
estimated at over half a million dollars, or a 20 per cent return on investment.
More generally, advances in information technology are making it possible for more
and more companies economically to build detailed databases on the behaviour and
attitudes of their individual customers. This allows them to target offers and commu-
nications that are specifically tailored to be relevant to the needs and expectations of
individual customers. We are seeing the emergence of ‘one-to-one marketing’.12
Finally, studies show that only 14 per cent of customers abandon a company due to
product performance problems. Two-thirds defect to another supplier because they find
service people indifferent or inaccessible. Such results highlight the importance of the
selection and training of front line staff and the development of customers as assets. In
their ‘moments of truth’, front line staff determine the future of the business.
Creating the customer-led business
Almost all top executives now claim that their companies are, or are to become, cus-
tomer led. Hospitals, public sector organisations and non-profit bodies increasingly
echo this claim. All now appear to see that a dedication to meeting the needs of cus-
tomers is the critical requirement for survival and growth. Yet few companies, in
practice, are truly customer led, and many that have tried to transform themselves
have seen their initiative languish.13 There are four main reasons for this failure:
■ Background of top executives. Most companies are led by chief executives without
training and development in marketing, and so they lack the fundamental com-
mitment to it. In some countries, notably the UK and the USA, their background is
often in accounting, so that a financial orientation dominates their thinking.
Short-term profitability and asset management take precedence over the customer.
In others, such as Germany, an engineering background is at the fore and a pro-
duction orientation often rules. In these companies, marketing issues receive
insufficient attention at the top level, and this lack of focus then permeates down
through the organisation.
■ Misunderstanding marketing. Many companies do not understand that marketing is
a business philosophy that requires a complete change in attitudes and practices
for everyone in the organisation. Instead they see it as setting up a marketing
department, harder selling, boosting advertising or upgrading the brochures. The
business is then pushed towards a sales rather than a marketing orientation.
■ Lack of commitment. Most chief executives underestimate the time and commit-
ment involved in becoming customer led. Often they expect to see results after a
year and the process completed in two. Unfortunately, changing the culture and
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C r e a t i n g t h e c u s t o m e r- l e d b u s i n e s s
the image of a company will generally take a generation of both employees and
customers. Retraining staff from long-entrenched and deeply held attitudes and
practices is an uphill task. Customers too have an image of the company built up
over years of experience and observation, and it takes a disconcerting length of
time for them to recognise a company’s new reality. The commitment to achieve
these changes will be massive both in the time and effort required from manage-
ment and in the resources that have to be put into the retraining tasks.
■ Resistance to change. Most truly customer-led organisations were born that way.
Such companies as Dell, Federal Express, Mars and Toyota had founders deeply
committed to a customer orientation. As St Paul said, ‘Faith is easier than conver-
sion.’ Non-marketing-oriented organisations resist change. They look back to
distant days of success achieved without these new ideas. Non-marketing func-
tions see the new philosophy as a threat to their power. Marketing departments
often exacerbate these conflicts by seeking to appropriate control over the process
and to enhance their power over resources. Overcoming such resistance requires
sensitivity and leadership of a high order from the board.
Creating a customer-led business requires clarity of goals, an intense commitment

over a long period and the active involvement of the entire workforce. The change
process that is required can be divided into six stages (Figure 2.8).
Starting with the mission

Managers and staff must be motivated to commit to a revolutionary change in the
culture and practices of the organisation. They need to buy into an inspiring vision
of the company – a shared goal worth putting all their energies and ideas towards
achieving. Komatsu inspired the commitment of its workforce with its mission of
‘encircle Caterpillar’ – taking over as number one in the industry. People react best
when they are given a clear, motivating challenge – a major competitive threat to
beat off, or achieving a visible leadership role in the market. Top management have
first to find, then to articulate, and finally to enthuse people around such a clear
vision of winning the game.
Then management must connect winning with satisfying customers. This is an educa-
tional job of making staff see that being ‘the best’ results from being the preferred
choice of customers – and that being the preferred choice means finding out what
Marketing Strategy
Mission
audit formulation
Education
Figure 2.8 Implementation Maintenance
and training
Creating the
customer-led
business
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customers want, producing the quality solutions and delivering them to customers
better than any competitor. This educational process is normally most effectively trig-
gered by an executive workshop led by an outside professional. The goals of the
workshop are to build a genuine understanding of the marketing concept and to create
a common language and framework for taking it forward. The result of this initial
phase should be a management team confident enough to articulate, lead and imple-
ment the customer revolution in their areas of responsibility. An interesting example is
provided by Oakley, best known for its eyewear. The company describes itself as
‘A technology company fueled by a raging distaste for mediocrity and a fierce devotion to
innovation.
Today, Oakley is driven to seek out problems, create solutions, and wrap those
solutions in art. The company’s obsession with innovation has built a legacy of science,
sculpture, and defiance of conventional thinking. Reinventing the concept of eyewear
was only the first step. The passion that ignited the optical industry is now unleashed on
high-performance footwear, wristwatches, apparel and accessories.’
The marketing audit

The second stage is collecting information to permit a detailed analysis of the current
situation and to assess what needs to be done. Three types of audit need to be under-
taken. The first and most important is the customer audit. The objective is to establish
the base: how good is the company really at satisfying customers’ needs? What does
it need to do to improve its service to customers? What should be measured? To for-
mulate a base for improving quality, management needs to identify valid measures of
‘quality’. These must be what customers define as quality – what customers want and
expect from the company. Being customer oriented means making sure the business
is really selling what the customer wants to buy.
The different customer-impinging processes will need to be evaluated separately. A
hospital might separately measure its in-patient and out-patient operations. A manu-
facturer would measure its order processing, delivery and installation, customer usage
of its products, and after-sales service. It will also want to benchmark against key
competitors. Once the audit is designed, the company will collect data on a sizeable
and representative sample of customers and potential customers. It will almost cer-
tainly employ an independent market research agency to conduct ‘focus group’
interviews, followed by a larger poll of customers. When these data are collected and
analysed, management have the information to move forward.
Second, the company must undertake a comprehensive assessment of its competitive
environment. Customer needs and the technologies for meeting them will change in
the years ahead. The trajectory of changes in demographics, the company’s environ-
ment, its technology, markets and culture should be assessed. The management team
have to determine whether the thrust of their product and marketing efforts looks
right for the world they are moving into. Does the company have the wherewithal to
be competitive over the next decade? Does it need radically to change its technology
and markets?
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Box 2.3 Importance of employee attitudes

Southwest Airlines, the Texas-based pioneer of low-cost air travel, has been the USA’s only consistently
profitable airline through the last 25 years. It has become an icon for many of today’s managers seeking to
achieve extraordinary levels of productivity and customer satisfaction.
Southwest’s success is rooted in the enthusiasm of its employees. The company’s mission is to deliver
‘positively outrageous service’. Paradoxically, it believes that the best way of achieving this objective is to
say that customers come second. The company’s top priority is treating its employees well, out of a firm
belief that if its people are happy, everything else will fall into place. Southwest has created a fun place to
work, which in turn has resulted in the airline being a fun experience for passengers.
It does this by selecting prospective employees who have a sense of humour and commitment to service. A
high-powered ‘culture committee’ of over 100 employees ensures that Southwest’s spirit remains special.
Birthdays, marriages and promotions are celebrated with champagne and cards from the CEO. Everyone is
on first-name terms, rules are few and staff are encouraged to use their own initiative. As a result,
Southwest is becoming America’s fastest-growing and most profitable airline. The European low-cost
airlines, notably Ryanair and easyJet have attempted to recreate the Southwest model and have succeeded
in terms of infrastructure and operations, but they have failed to replicate the Southwest culture. Relatively
few of their passengers perceive their air travel experience as fun.
Finally, the company should undertake an audit of employee attitudes and views.
First, management needs to know how employees feel about the company. If employ-
ees are not inspired by the company’s mission and if they do not feel well treated by
management, they are unlikely to extend themselves in treating customers with care,
courtesy and commitment. Management will be in an unwinnable situation if
employees feel insecure, frightened to take initiative and unrewarded for their efforts.
Second, since a customer orientation requires teamwork, the company should
explore cross-functional attitudes. How do R & D people feel about marketing and
production staff? Are narrow, functional perspectives hindering progress? Third, man-
agement should seek to elicit what employees think should be done to improve
internal operations and attitudes, and to enhance external performance.
Strategy development
Once all this information is obtained, management have to develop a positioning
strategy with the goal of obtaining high marks on the customers’ scorecards. A posi-
tioning strategy has two components. The first describes what target markets the
business is going to serve. Because different market segments have radically different
customer wants, competitors and price expectations, it is usually necessary to choose
a focus. Jan Carlzon decided to focus SAS on business travellers. Ryanair and easyJet
initially focused on cost-conscious leisure travellers but found they were actually
attracting as many business travellers. The publishers Prentice Hall chose to focus on
the university textbook market. The second aspect of positioning strategy is the
determination of what the business’s differential advantage should be – how it can
get target customers to prefer it to competitors.
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Michael O’Leary has made price the differential advantage of Ryanair. Amazon.com
chose breadth of assortment and service. Volvo made car safety its selling point. The
requirements of the differential advantage are two. First, it must offer an advantage
that customers will truly value. The customer audit should have highlighted this
dimension as a critical choice factor. Second, it must differentiate the business in the
eyes of the customer.
Top management must hammer out a clear positioning strategy for the business.
Positioning determines the targets, who the customers are it will seek to serve, and
how the business will obtain the preferences of these target customers. The best vehi-
cle for formulating such a strategy is an executive retreat. To make it effective, the
workshop should be preceded by careful planning and preparation. Executives need
to be assigned the tasks of summarising the results of the three marketing audits,
evaluating their implications and presenting the strategic options available. The chief
executive needs to encourage a freewheeling debate about the strategy and how it
might be implemented. Often an experienced facilitator will be useful to guide the
discussion, to highlight the issues and to advise on ‘making it happen’.
Education and training

Translating strategy into action usually requires a large-scale campaign of education
and training of the workforce. This phase has four objectives. First, management has
to communicate to everyone in the organisation the ‘putting customers first’ mes-
sage. Staff need to understand what the company is trying to achieve and why it is
crucial for everyone’s future. Second, employees need to be fed back the results of
the marketing audits – how customers and staff judge the organisation and how the
competitive environment is changing. People need to know where the problems are,
so that they can see what needs to be done to improve competitiveness. Third, the
training session should be designed to involve employees in the change process.
Staff need to be encouraged to consider how they as individuals can contribute to
improving customer service. Fourth, the workforce has to be given the skills neces-
sary to do the job properly. For example, British Airways staff were taught how to
cope with the stress of customer contact, how to deal with the feelings generated by
intensive customer service activities, and how to communicate effectively and
assertively under pressure. The aim was to help staff become more personally effec-
tive and confident in their performance.
Implementation
The biggest problem in any change programme is achieving large-scale commitment
and long-term follow-through. The best way of achieving this is not telling people
what to do and how to do it, but rather empowering staff to identify the key tasks
themselves, and encouraging them to get on with finding and implementing solu-
tions. The tasks of management are to enthuse and facilitate the efforts of the front
line to become customer driven, rather than to act as decision-makers and rule-
enforcers. Two mechanisms are particularly useful for encouraging grass-roots
commitment: quality circles and challenges.
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A quality circle is a group of front-line people who meet on a regular basis to find
better ways to do their work. Working effectively, quality circles can prove invaluable
for investigating issues, problem solving and developing new methods for meeting
customer needs. Jaguar used to be a strong brand hindered by poor quality. Even
many of Jaguar’s most enthusiastic owners in the United States would say: ‘It’s better
to have two, if you want to be sure one stays on the road.’ Part of the drive to
improve quality came from some 50 ‘quality circles’ which were set up, and standards
were lifted to achieve the levels of quality needed. These circles have produced
numerous recommendations and ideas for improvement; hundreds of these ideas
have been implemented and have resulted in dramatic improvements in quality.
Experience suggests that quality circles need to be encouraged to focus, and to avoid
spending too much time on side issues such as the food in the company canteen or
car parking problems. Their real focus should be on serving customers better. Giving
them a clear customer mission is the best way of keeping them on track. Looking for
new and better ways of scoring high marks on the customer’s report card can give the
group a sense of importance and a feeling that it is making a worthwhile contribu-
tion to the organisation’s success.
A second tool for achieving continuing commitment is the ‘challenge’. A challenge is
a task usually undertaken by a cross-functional team, to achieve a specific, measura-
ble customer-related goal within a specified period. For example, SAS identified
punctuality as a key want of its business customers. Carlzon challenged his staff with
making SAS the most punctual airline in Europe. The goal was championed by a proj-
ect team and became a rallying idea that captured the imagination of SAS staff,
including the chief executive, pilots and ground staff. Within three months and with
the expenditure of under £100,000, SAS achieved its objective. Successful companies
such as General Electric, Toyota and Microsoft run a continuous series of challenges
to foster a sense of excitement, commitment and renewed enthusiasm that can carry
forward the programme of becoming customer driven.
Maintenance
At some imperceptible point, the customer orientation programme ceases to be a
change campaign and becomes the basic orientation of the organisation. Then the
company’s strategy, structure, systems, people and leadership are integrated and
totally focused on satisfying customers’ profitably (Figure 2.9).
The customer-oriented company has a clear positioning strategy. Everybody knows its
target market segments and the competitive advantages on which it seeks to focus. Its
organisation is flat and built around supporting the front line, whose responsibility is
to provide quality products and services. People in this type of organisation are
highly responsive to customer requirements.
The support systems in the organisation have also to be aligned to serving the cus-
tomer. All job definitions – both front line and staff positions – should describe how
their work contributes to satisfying customers. New employees should understand
from the beginning the total customer focus. The orientation and subsequent train-
ing programmes should re-emphasise this basic value. Information systems should
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Systems Strategy
Customers
Structure People
Figure 2.9 Leadership

The customer-
oriented business
regularly monitor how effectively the organisation is scoring in meeting customer

needs. Appraisal and reward systems need to provide feedback to employees about
the effectiveness of their efforts. If top management wants the organisation to be cus-
tomer driven, it does not make sense to appraise and reward people largely on the
basis of short-term financial measures.
Finally, top management, and in particular the chief executive, must provide visible
and consistent support for the drive to be customer oriented. They need to demon-
strate their wholehearted commitment to the marketing concept and to use every
occasion to preach the gospel of service to the customer.
Box 2.4 It’s not just the Fortune 500

Mars, the food, confectionery and pet food company, is a family-owned business (one of the largest private
manufacturers in the world). Members of the family work in the business and no employee has a private office.
This includes the chief executive, who sits in the back corner of a huge open-plan room, sharing a secretary
with two others. All employees handle their own phone calls, make their own copies, and are separated from
each other by no more than five pay grades. The business is driven by five principles and, unsurprisingly for a
customer-oriented business, ‘consumer’ is the first substantive word in its statement of principles:
Quality
The Consumer is our boss, quality is our work and value for money is our goal.
Quality was and still is the foundation of our success. Today, our goal is quality in everything we set out to achieve, the
products we make, the services we provide, the people who make up the Mars team.
▼
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For Mars, quality is measurable. Quality means guaranteeing consumers that our brands will live up to their
expectations – time after time, without deviation.
Quality is the result of unremitting attention to detail at every stage: picking the right raw materials; selecting people
who are excited by quality in their work.
We can only deliver the quality we promise consumers if everyone at Mars is focused on quality.
Responsibility
As individuals, we demand total responsibility from ourselves; as associates, we support the responsibilities of others.
Respect for the individual is at the heart of the Responsibility principle. At Mars we encourage associates to accept
personal responsibilities so that all associates can achieve their full potential.
We focus on breaking down divisive work practices that depend on status. Private offices and reserved car parking
spaces are not part of the Mars culture.
Communication and team-work turning common business goals into shared aspirations; ethical practices and high
standards of corporate responsibility; honesty and candor; cultural diversity; these all build a framework for human
relations which supports the individual and promotes an open environment of trust.
Mutuality
A mutual benefit is a shared benefit; a shared benefit will endure.
Mutuality describes the standard to which everyone at Mars aspires in all our business relationships.
Enduring success is best built by sharing benefits: we want everyone to benefit from their contact with Mars. Suppliers
who deliver quality goods and services find we are a loyal customer who pays promptly. A thriving retail and wholesale
trade is vital, and our work to ensure their success is rewarded by fair dealing. Our associates make mutuality work in
practice by their commitment to help all our stakeholders succeed and their efforts are well rewarded.
Efficiency
We use resources to the full, waste nothing and do only what we can do best.
We get things right the first time. Our efficiency lets us operate with fewer resources than any other company our size.
We achieve this by stringent resource selection and only doing the things we do best. We rely on other specialists in
advertising, in logistics and many other specialisations to do the rest.
Efficiency means using our limited resources to the full. Our factories work round the clock – year in, year out. Our
brands are global – one name worldwide. Open plan offices dispel artificial barriers, enabling easy communication for
everyone who works at Mars. And we are always looking for new ways. The rule book is there to be torn up.
Freedom
We need freedom to shape our future; we need profit to remain free.
Mars is one of the world’s largest food businesses, and – almost uniquely today – is still a family-owned company.
Private ownership has been a deliberate choice and has allowed Mars to retain its freedom. The often easier option of
selling stocks and raising loans would have relinquished control to those whose sole interest was making money.
Mars history shows that success can be achieved in another way and profit is the key. Profit allows us to remain free,
to invest wisely, to endure short-term lows in return for long-term highs and to run the business in our own distinctive
manner.
Freedom as a company means freedom for individuals to find better ways to reach our common goals.
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Summary
The marketing concept is not a theory of marketing, but a philosophy of business. It
affirms that the key to meeting the objectives of stakeholders is to satisfy customers. In
competitive markets this means that success goes to those firms which are best at
meeting the needs of customers.
The top priority of business today is organising to motivate employees to find new and
better ways of satisfying customers. Marketing, in competitive, free enterprise markets, is
both a central management task and an engine for economic progress. The tasks of the
government are to encourage competition and to ensure that firms do not impose
damaging environmental impacts upon others.
Questions
1 How, if at all, are marketing and democracy related?

2 What characteristics would distinguish a marketing-led company from production- and
finance-led companies?
3 Why is it important to obtain explicit feedback on customer satisfaction? Develop a short
questionnaire that might be used to elicit such feedback for an organisation with which you
are familiar.
4 The 1990s saw a shake-out of middle management and a delayering of organisations.
Why?
5 What are the main ways in which a company could search for developing a competitive
advantage?
6 ‘Most British companies are not marketing oriented.’ What does this mean? How could
they become marketing oriented?
Notes
1. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.
2. These distinctions follow Philip Kotler, Marketing Management, 11th edn (Englewood Cliffs,
NJ: Prentice Hall, 2003), pp. 9–10.
3. The practical approach to effective negotiation relationships is covered in Roger Fisher and
William Ury, Getting to Yes, 2nd edn (London: Hutchinson, 1992), and Roger Fisher and
Scott Brown, Getting Together (London: Business Books, 1989).
4. Kotler, op. cit., p. 9.
5. Milton Friedman, Capitalism and Freedom (New York: Macmillan, 1962); F.A. Hayek, The
Road to Serfdom (Chicago, IL: University of Chicago Press, 1994).
6. For other definitions and a good introduction to marketing, see Michael J. Baker, Marketing:
An introductory text (London: Macmillan, 1996).
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Notes
7. Theodore Levitt, ‘Marketing myopia’, Harvard Business Review, July–August 1960, pp. 45–56.
See also Stephen King, ‘Has marketing failed or was it never really tried?’, Journal of
Marketing Management, Summer 1985, pp. 1–19.
8. Peter F. Drucker, Management: Tasks, responsibilities, practices (London: Heinemann, 1974),
p. 63.
9. The data presented here are based on studies reported in Karl Albrecht and Rom Zemke,
Service America (Homewood, IL: Irwin, 1985), Lindon Silverman Goldzimer, Customer Driven
(New York: Macmillan, 1989) and Frederick F. Reichheld and Thomas Teal, The Loyalty Effect
(Boston, MA: Harvard Business School, 1996).
10. Marketing Magazine, 27 October 2004.
11. Drucker, op. cit., p. 65.
12. Don Peppers and Martha Rogers, Enterprise One-to-One: Tools for competing in the interactive
age (New York: Doubleday, 1999).
13. Nigel Piercy, Market-Led Strategic Change, 3rd edn (London: Butterworth-Heinemann, 2001).
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9736 MMST_C03.QXD 12/5/05 2:46 PM Page 63
‘Market segmentation
and positioning are the keys
to building a strategy
for corporate growth.’
Theodore Levitt
Chapter 3 SEGMENTATION, POSITIONING AND

THE MARKETING MIX
‘Marketing’ has two distinct meanings. The first, and most important, is as a philosophy
for the whole business. It defines the primary goal of everyone in the organisation as
meeting the needs of customers. Marketing is the philosophy that integrates the dis-
parate activities and functions which take place within the organisation. Satisfied
customers are seen as the only source of the firm’s profit, growth and security. The
second meaning of marketing is as a distinct set of activities and tasks that constitute
marketing planning and decision making.
These marketing decisions and plans centre around four areas and they are the subjects
of this chapter.
■ Market segmentation. Management have to segment the markets in which they oper-
ate, research the needs of customers in these segments, and study their
characteristics, decision-making processes and buying behaviour.
■ Selecting target markets. The attractiveness of the different segments in terms of
profit and growth have to be analysed, and those offering the firm the best potential
need to be chosen.
■ Market positioning. Once a segment is chosen, the firm has to seek to build a differ-
ential advantage that will make its offer preferred to those of competitors. It will then
develop a marketing mix to implement this positioning strategy.
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Chapter 3 Segmentation, positioning and the marketing mix
■ Marketing planning. Management will then develop a plan to implement the position-
ing strategy and build an organisation capable of exploiting the potential of the
market.
Figure 3.1 describes the main steps in market segmentation, targeting, positioning and
planning. Whereas the philosophy of marketing refers to the whole orientation of the
firm, marketing planning and decision making take place at a more disaggregated level.
Marketing decisions are about how better to satisfy customers in individual market seg-
ments. These decisions and plans are therefore made by managers at the business unit,
market or product planning levels of the firm.
Figure 3.1 Segmentation, positioning and planning
Market segmentation Target marketing Marketing positioning Marketing planning
1. Identify customer 1. Evaluate 1. Identify differential 1. Develop marketing

needs and segment attractiveness of advantage for each plan for each
the market each segment segment segment
2. Develop profiles of 2. Select target 2. Formulate 2. Develop marketing
resulting segments segments marketing mix organisation
Market segmentation
A market consists of customers with similar needs. But customers in a market are
never homogeneous. They differ in the benefits wanted, the amount they are able or
willing to pay, the media they see and the quantities they buy. It therefore makes
sense for marketers to segment the market and target one or more of these segments
with specialised, tailored offerings. A market segment is a customer group within the
market that has special characteristics which are significant for marketing strategy. In
most markets the need for segmented offerings is obvious because a single product
will not satisfy all the customers. For example, rich people want more luxurious hotel
accommodation than poor people; engineering offices need more powerful and
sophisticated computing systems than secretarial offices; acute asthma patients need
different drugs from mild or infrequent sufferers.
The current Nike catalogue carries over 350 separate styles of sports footware. Philips
produces 24 different irons and 13 kettles. The retailer Tesco carries over 170 varieties
of shampoo and over 50 kinds of toothbrush, not taking into account colour varia-
tions. That people have different tastes is fairly obvious. What managers often do not
understand, however, is that it can pay to segment markets even when a single prod-
uct is able to meet effectively the needs of the entire market.
In some business-to-business (B2B) markets, where a small number of large buyers
dominate, suppliers will treat each of these major buyers as an individual segment.
Many see this type of one-to-one marketing as becoming more important even in
consumer (B2C) markets, where the number of buyers may be in the millions. Today
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Market segmentation
information technology, especially computers and the Internet, allows suppliers to

store detailed information about individual customers. Direct marketing (telephone,
direct mail and the Internet) allows companies to tailor communications individu-
ally. Finally, modular design and customised manufacturing permit companies such
as Dell and Cisco to produce individually tailored products.1
However, even companies that espouse one-to-one marketing find it useful to group
or segment customers by value or need, so that they can manage them efficiently.
Dell, for example, classifies its customers into five segments according to their poten-
tial profitability to the company. The higher the importance category a customer falls
into the greater the support and customisation it receives.2
Segmentation or customisation increases profit opportunities because different
groups of customers attach different economic or psychological values to the solution
offered. For example, some years ago a European chemical company developed a new
patented herbicide that increased the productivity of any type of farmland. However,
in practice, the economic value to the customer (EVC) of this innovation depended
upon what the farmer grew. If the land was used for rough grazing, the EVC of the
productivity improvement averaged only €7.5 per acre; for cereal products the EVC
was €30 per acre; and for fruit and vegetables it was €60 per acre. Suppose the market
consisted of 3 million acres split evenly between the three crops. If the company
decides to sell the herbicide to the market as a whole, the price must be below €7.5 to
give any advantage on grazing land. If the company charged €6 and its costs were as
shown in Table 3.1, then the profit from the market would be €1.5 million. An alter-
native strategy would be to concentrate solely on the high-productivity fruit and
vegetable farmers where it believed a price of €60 could be obtained. Even though the
company would be focusing on only one-third of the market, this strategy would
increase the profit potential to €52.5 million. The strategy with the most potential,
however, would be a segmentation strategy. This would involve selling different ver-
sions of the product to each segment at prices to attract the separate types of
customer. In this case the company would have brands covering the whole market,
but still tap the value surplus in the premium segments.
The company’s ability to maintain this strategy would depend first upon its building
barriers to competition entering the market and, in particular, the high-price segments,
and second on maintaining a separation of three segments. Farmers on premium land
must continue to see the brand aimed at the low-value land as unattractive for them.
In practice, the supplier would seek to do this by focusing its innovative effort to
Table 3.1
Strategy Price (€) Acres (m) Revenue (€m) Cost* (€m) Profit (€m)
Segmentation of
agricultural Unsegmented 6.0 3 18.0 16.5 1.5
chemicals
Focus 60.0 1 60.0 7.5 52.5
Segmented
Grazing 6.0 1 6.0 5.5 0.5
Cereal 22.5 1 22.5 5.5 17.0
Fruit 60.0 1 60.0 5.5 54.5
––––– ––––– ––––– –––––
Total 3 88.5 16.5 72.0
*Variable cost per unit = €4.5 total fixed costs = €3m (affected equally across the segmented case)
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produce an even more superior product for the highest-value segment. Market segmen-
tation is a spur to innovation by revealing hidden profit opportunities that can be won
by better meeting the needs of specific high-value customer groups.
Core segmentation: an illustration

To demonstrate the central role of segmentation in building growth and profitability,
the strategy of a modern hotel can be shown. In the early days, individual hotels did
not segment their market. But it soon became clear that guests differ in their expecta-
tions. Business travellers valued convenience, comfort and service, while leisure
visitors were more interested in low price. Table 3.2 illustrates the pricing and cost
options for a hotel with 300 rooms and anticipating an average occupancy rate of 80
per cent. If it pursued an undifferentiated – one-class – hotel, then management
believed €80 to be the highest price chargeable to achieve 80 per cent occupancy. In
this case the budgeted profit per day would be €4,000
However, to the marketing management it was obvious that, while a price of €80
already begins to lose the business of low-budget guests, businesspeople and more
affluent customers would be willing to pay much more for superior service and com-
fort. The result was that hotels moved to a differentiated strategy whereby they
offered three levels of service – regular, executive and suites – at very different price
levels. As shown in Table 3.2, the first consequence is to enhance revenue and prof-
itability. Profit increases 25 per cent to €5,075. Second, the differentiated service
better meets the needs of all customers by offering the values that the particular type
of traveller prioritises. The best hotel operators remember that people who stay as
business customers frequently return with their families as leisure customers and
understand that segment membership is normally not unique.
This example of hotel guest segmentation is exactly analogous to the strategies pur-
sued by most of the sophisticated marketing companies of today, as a few examples
can demonstrate.
■ Scotch whisky. Until the 1980s Scotch was an undifferentiated market. Then Diageo,
which sold the brand leader Johnnie Walker Red (now priced at about €25 per litre),
launched a deluxe version called Johnnie Walker Black at a 60 per cent price pre-
mium (€40 per litre), selling to status-oriented customers. Later it added Johnnie
Walker Swing (€37), Premier (€120), Blue (€175) and Johnnie Walker Gold (€80). In
a market that is declining in volume terms, Diageo’s profits have continued to grow.
Table 3.2 Segmentation of hotel guests
Class Rooms Price Variable Revenue Variable Fixed Profit /

(€) cost (€) (€) cost (€) cost (€) day (€)
Undifferentiated strategy 240 80 40 19,200 9,600 5,600 4,000

Differentiated strategy
Regular 140 80 40 11,200 5,600
Exec. 65 130 65 8,450 4,225
Suite 5 250 80 1,250 400
––––––– ––––––– ––––––– –––––––
Total 210 20,900 10,225 5,600 5,075
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Market segmentation
■ Credit cards. Initially, credit cards operated in a largely undifferentiated market.

Then American Express launched its Gold Card with a membership fee of €150,
double that of its standard Green Card. Subsequently, it added a Platinum Card
with a €400 membership fee. Amex substantially increased its profits by trading up
its more affluent customers into higher-margin products.
■ Pharmaceuticals. Pharmaceutical companies have become more adept at segment-
ing their markets and targeting offers that more precisely meet patient needs and
capitalise on opportunities to add value. Glaxo, which is leader in the €8 billion a
year asthma market, now segments patients into severe, moderate and variable suf-
ferers. Prices range from €14 per month’s treatment to €100 for the highly
specialised products needed by acute patients.
■ Cars. The market for cars is highly segmented. Mercedes-Benz, for example, has 20
models, from under €20,000 to over €200,000. Each model also has an extensive
range of options: different-sized engines, different gears, sports equipment, air con-
ditioning, etc. Every model is aimed at a specific target segment and the company
encourages customers to trade up over time to higher-priced versions.
■ Others. The list of markets where the leading players pursue segmented strategies is
virtually limitless. It is pursued by airlines, restaurants, the railways, in marketing
seats for the opera, by football clubs, in selling beer and wine, computers, educa-
tional programmes, electronics, etc. It is a feature of all consumer markets and
more and more industrial and service markets. A price ratio of 1:10 from the
lowest- to the highest-priced offer in a segmented market is common.
Why segment markets?
Better matching of customer needs

Because the needs of customers differ, creating separate offers for each segment pro-
vides better solutions. For example, if an airline treated all passengers alike,
businesspeople would be unhappy with the level of service provided for the ‘average’
customer, and impecunious students would be unhappy about the average price they
had to pay. Developing separate ‘brands’ for each segment allows a higher level of
satisfaction for both.
Enhanced profits
Customers differ in their price sensitivities and, by segmenting the market, the mar-
keter can raise average prices and substantially enhance profits. Experience shows
that in most markets it is very difficult to raise prices to all customers by 5 per cent.
However, it is often very easy to raise prices to some customers by 10 per cent or
more. Price increases and profit margin enhancements are invariably best achieved
via a segmentation strategy. Many production-oriented businesses fail to see this.
Three arguments are used to resist profitable segmentation. First, managers are dis-
couraged by the additional costs of producing multiple, rather than single, product
offerings. Second, they perceive the volume in the additional premium segment as
small compared to their current mass-market offer. Third, they often argue that the
additional brand would cannibalise sales from their current product.
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What the managers fail to calculate is that the marginal revenue often vastly outweighs
these negative factors. For example, after Diageo launched its premium brands of
Johnnie Walker Scotch, while they represented only 20 per cent of the volume of its
mass Red Label brand, and did in fact cannibalise some of its sales, the much bigger
margins on the premium brands were estimated as doubling the profits of the business.
Enhanced opportunities for growth

Segmentation can build sales growth by allowing the company to trade up customers
to higher-margin products. For example, Tesco has successfully grown its sales in the
UK by segmenting the market according to customer purchase needs and providing a
Tesco solution to each, which range from small neighbourhood stores (Tesco
Express), home delivery (Tesco.com) to Tesco Extra (a hypermarket format). American
Express, Mercedes-Benz and Diageo all see their low-price offers as entry-level brands
from which customers will be encouraged to move on to the premium ones, carrying
margins two or three times higher.
Retention of customers
As an individual’s circumstances change with age, family circumstances and income,
buying patterns also change. For example, in the car market an individual’s first car is
usually a small, low-priced one; then with a family, a bigger car is needed. If the
person is successful in career terms, this may be followed by an expensive, status car.
Finally, in retirement the individual may downsize again. By offering products appro-
priate to each family life cycle stage, the marketer can retain customers who would
otherwise switch to competitive brands.
Targeted communications
It is difficult for a company to deliver a clear message to a broad, undifferentiated
market. Effective communications require a demonstration that an offer will meet
the relevant needs of the potential buyer. This is much easier to achieve if the mar-
keter is targeting a homogeneous market segment.
Stimulation of innovation
Where the company pursues an undifferentiated marketing strategy, needs and prices
are reduced to the lowest common denominator. Segmentation offers a clearer under-
standing of how needs and economic value to customers vary across the market. This is
illustrated in Table 3.1. The profit margin of only €1.5 million in the undifferentiated
market is insufficient to encourage investment in innovation. When the market is seg-
mented, however, new profit opportunities appear. In certain segments the potential
profit margin rises to €54.5 million – an enormous reward for new targeted offerings.
Market segment share

Unless a brand is the biggest, or second biggest, in terms of share, it is unlikely to
earn superior profits. Minor brands suffer from lack of scale economies in production
and marketing, and pressures from distributors with limited space. These factors
mean that they have higher costs and lower margins. Clearly, new or smaller compa-
nies are unlikely to achieve leadership in a total market, so they need to aim for
leadership in a segment or distribution channel. By focusing, they can often achieve
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Market segmentation
competitive production and marketing costs, and become the preferred choice of
buyers in a specific segment.
It is generally share rather than size that determines profitability. It is invariably
better to have 50 per cent of a €1 million market segment than 1 per cent of a €100
million market. The 1 per cent brand would not be the preferred choice of any cus-
tomers or channels; it will have high marketing costs, lack scale economies and have
to give big trade discounts to obtain distribution. By contrast, the 50 per cent brand
will be the preferred choice of a segment of the market; it can focus its communica-
tions and be a ‘must-stock’ item to selected dealers. Segmentation offers the
opportunity for smaller firms to compete with major ones.
Bases for segmentation

How should managers segment their markets so that tailored strategies can be devel-
oped? Unfortunately, segmentation is an art rather than a science. The task is to find
the variable or variables that split the market into actionable segments. Segmentation
variables are of two types: needs and profilers. Customer needs are the basic criteria
for segmenting a market. The marketer will want to form segments made up of cus-
tomers whose needs are homogeneous – who are seeking the same benefits – and so
are likely to respond similarly to a particular marketing offer and strategy. The second
type of segmentation variables are profilers. These are descriptive, measurable cus-
tomer characteristics such as industry, geographic location, nationality, age and
income. In general, these variables are complementary to each other. For example, a
company marketing toothpaste divided the market into four need segments: one
seeking low price, another prioritising decay prevention, a third interested in bright
teeth, and a fourth wanting a good-tasting toothpaste. The problem with this need or
‘benefit segmentation’ is that, to analyse these segments and communicate to them,
the marketer has to know who these people are: their profiles or customer character-
istics. Table 3.3 shows the results of a market research study that linked needs to
profilers describing the demographic, behavioural and psychological characteristics of
the customers, together with competitors in each need segment.
Consumer and industrial markets generally differ in their sets of need and profiler vari-
ables. Some of the most common segmentation variables in each are described below.
Table 3.3
Need segments Profiles
Needs and profiles
in the toothpaste Demographics Behaviour Psychographic Competitive brands
market
Economy Men Heavy Value Brands on
(low price) users oriented sale
Medical Large Heavy Conservative Crest
(decay families users
prevention)
Cosmetic Teenagers Smokers Active Macleans
(bright teeth) Ultra Brite
Taste Children Spearmint Hedonistic Colgate
(good tasting) lovers Aim
Source: Adapted from Russell I. Haley, ‘Benefit segmentation: a decision-oriented research tool’, Journal of Marketing,
July 1963, pp. 30–5.
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Consumer market segmentation

To find the needs of customers in a market, it is necessary to undertake market
research. This will normally consist first of informal interviews and focus groups to
identify what benefits customers seek and the extent of differences among them in
their expectations. For example, are some giving the highest priority to low price,
while others are emphasising image or product performance? The next step will nor-
mally be administering a formal questionnaire to a large sample of customers to
quantify these differences in requirements. There are a variety of statistical tech-
niques such as discriminant analysis and cluster analysis to help in choosing the best
variables for segmenting the market.3 Often the market will be divided into segments
oriented towards quality, service, performance and economy.
The next step will be to seek to link these differences in needs to profilers or con-
sumer characteristics. The survey questionnaire should have collected data on both
the needs sought and the characteristics of respondents. The most common profilers
used in consumer market segmentation are as follows:
■ Geographic
– Region of the country
– Urban or rural area
■ Demographic
– Age, sex, family size
– Income, occupation, education
– Religion, race, nationality
■ Psychographic
– Social class
– Lifestyle type
– Personality type
■ Behavioural
– Product usage: light, medium, heavy user
– Brand loyalty: none, medium, high
– Type of user: e.g. with meals, special occasions, etc.
Organisational market segmentation

The process of segmentation in industrial and other organisational markets is analo-
gous to that employed in consumer markets. First management has to segment the
market by benefits sought, then it has to describe the characteristics of these cus-
tomers. The needs of organisational customers depend upon their strategy, their
operating environments and the personal characteristics and relationships of the
individual buyers within the organisation. For example, a buyer in a static, commod-
ity business is likely to be highly cost oriented. An organisation in a dynamic, high
value-added segment may be geared more to the performance-enhancing features of
the product or the seller’s speed of response.
The most common profilers in organisational markets are as follows:
■ Industry of end user (e.g. agriculture, aerospace, construction).
■ Organisational type (e.g. public or private sector).
■ Size of organisation (e.g. big or small, national or multinational).
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Market segmentation
■ Geographical location (e.g. regional, urban, rural).
■ Application (e.g. heavy or light use).
■ Usage (e.g. heavy or light user; loyal or non-loyal).
■ Purchasing organisation (e.g. centralised or decentralised, purchasing policy and

criteria, nature of decision-making unit).
In commodity-type markets, managers often make the mistake of thinking that all
customers are the same in their desire to get the lowest possible price. But such a view
is invariably mistaken and costly. Studies by McKinsey and others have shown that
even in these markets customers normally divide into three segments.4 The first are
price-sensitive buyers who are primarily concerned with the cost – and less so with
the quality – of their purchases. Price is crucial because the product usually represents
Box 3.1 Segmentation and Differentiation

Segmentation is a simple concept which is often difficult to implement. One reason is that companies must
understand whether product differences are real (the users can distinguish the competitive brands) and
whether the segments are real (buyers can be reached in the segment).
No real product Real product

differences differences
No
(A) Unleaded petrol (C) Confectionery
segments
Real
(B) Blended whisky (D) Breakfast cereal
segments
(A) No Real Product Differences and No Segments – One brand of gasoline is indistinguishable from
another (the car does not know which brand is in the tank). Indeed, due to the economics of
transportation, in some geographic areas it is likely that the gasoline at a specific filling station is
actually sourced from a competitor’s refinery and even delivered by them. Similarly there are no clearly
definable segments – all drivers need to fill up their cars.
(B) In a blind taste test, an average consumer would find it hard to tell the difference between a €40
Johnny Walker Black Label and an €80 Gold Label, and yet there are real segments based on
distribution outlets, with the expensive brands having limited availability in specialist stores and duty
free outlets.
(C) Anyone can tell the difference between a Mars Bar and a KitKat, the brands are different and yet they
appeal to exactly the same customers.
(D) Again, anyone can tell the difference between Corn Flakes and Frosties, but unlike confectionery there
are segments in this market based upon whether families have children and are therefore much more
likely to buy pre-sweetened breakfast cereals.
Marketing managers must understand the nature of their specific situation as it affects their ability to
implement a successful segmentation strategy.
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a major portion of their total product costs. Next is the service segment – customers
who require the highest levels of quality and delivery performance. For them, price is
secondary both to security of supply and to performance, as the product represents a
relatively small, yet critical component of their total costs. Finally, commitment-
focused customers value close, longstanding relationships through which superior
product applications can be developed for their own products and processes. Such
segmentation offers real opportunities to increase sales, achieve better profit margins
and gradually reposition the business into more attractive markets.
Multilevel segmentation
Effective segmentation is not only about grouping customers according to need.
Further opportunities lie in distinguishing the nature of the decision-making unit
within any customer account. In many situations there is not a single buyer whose
needs have to be met, but several people whose needs may differ. There are often
opportunities for the seller to target specific persons within any decision-making unit.
In consumer markets, a family’s choices can be influenced by husband, wife or chil-
dren, together with others outside the household who influence them. Each
individual often has different buying criteria and roles in the buying decision. For
example, in buying a new car the husband might initiate the process and be prima-
rily influenced by economic factors; the children might affect the model choice and
be motivated by performance; and the wife might be the main user and consider size
and comfort as key factors.
Companies can often gain advantage by innovative strategies to target specific mem-
bers of the decision-making unit. For example, Stew Leonard created the supermarket
with the highest sales per square foot in the world. He noticed that mothers often
had to take young children with them on their shopping trips. He redesigned his
store with mini-shows, exhibits and Disney characters to appeal to young children
and take the boredom out of shopping. Shopping became a fun experience for moth-
ers with young families. Mothers drove with their young children for as long as two
and a half hours to shop at Stew Leonard’s.
In industrial markets, decision-making units and buying processes are even more
complex, offering enormous opportunities for creative marketing. Typically a mini-
mum of three parties can be involved in a purchasing process – the company’s
buyers, technical department and senior management. Each of these have different
needs and purchasing criteria – normally price is the key factor for buyers, perform-
ance and specifications for technical people, and economic value (the impact on
profits) for top management.
With a new, innovative industrial product or service it is often crucial to circumvent
the control of the buying department so that the system economics can be demon-
strated to top management. For example, a new machine might reduce labour costs in
a production process by 50 per cent, offering a massive profit improvement for the
customer, even though the machine costs 30 per cent more than those of the competi-
tors. However, the customers’ buying department would be deterred by the high price
of the new machine. Many suppliers lack the sales expertise to overcome this problem,
which requires attracting the interest of top management in the impact of the innova-
tion on their return on investment. (This is discussed further in Chapter 8.)
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Market segmentation
Meeting customer needs and providing customer value require market segmentation.
But meeting needs and providing value are not simple. They entail an understanding
in depth of the customer’s decision-making unit and buying processes. The supplier
has to ask who influences the purchasing decision and what are the specific needs of
each group. It then needs to assess the value and cost of meeting these various needs.
Often this will require choices – should it focus on meeting the needs of professional
buyers for lower costs, or on the needs of senior management for higher business per-
formance? The choice will depend upon the skills of the company and the
characteristics of its products or services. Finally, the supplier has to have the skills to
communicate the benefits to the desired personnel within the buying centre.
Criteria for segmentation

To be a strategic tool, a segmentation scheme should meet five criteria:
■ Effective. The segments identified should consist of customers whose needs are rela-
tively homogeneous within a segment, but significantly different from those in
other segments. For example, an industrial marketer might identify the engineer-
ing and aerospace industries as separate segments, but if buyers in both industries
purchase similar amounts at similar prices and have the same needs, it is not a
useful segmentation scheme.
■ Identifiable. The business must be able to identify customers in the proposed seg-
ment. Some variables are harder to measure. For example, if a product is aimed at
‘extrovert’ customers, it would be difficult to identify and measure the size of this
potential segment. To be useful, it is necessary to find some customer characteris-
tics that link to the psychological profiles, such as age, media usage or nationality.
■ Profitable. The more segments identified, the greater the opportunity to target the
offer precisely and to add value. Ultimately, each customer could be an individual
segment. However, the greater the number of segments targeted, the higher the cost
involved in separately targeting offers, and the greater the loss of economies of scale
in manufacturing, marketing and distribution. Nevertheless, with the spread of
CAD/CAM flexible manufacturing and with the growth of direct marketing tech-
niques, more and more businesses are finding that narrower segmentation pays off.
■ Accessible. Customers in the segment should be capable of being reached and
served effectively. For example, if it is decided to advertise a new industrial product
to innovative buyers, and it is found that such buyers read the same journals as
late adopters, then a substantial part of the advertising budget would be wasted.
Such a segment is not amenable to separate communications.
■ Actionable. A company must be able to take advantage of the segmentation scheme
that it develops. A small petrol station might divide its customers into several seg-
ments with different potential needs and spending power, but it would probably
lack the staff, space and facilities to respond to these differences. By contrast, a
large petrol station might have the opportunity to pursue such a differentiated
strategy. For example, US stations provide both ‘self-service’ economy and ‘full-
service’ premium offers to customers. With the latter, the attendant fills the tank
and provides a check on the car’s oil, tyres and windscreen, in return for a 20 per
cent premium on the price of the petrol.
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Dynamic targeting strategies
Choosing target market segments

After segmenting the market, the business must select those segments it aims to
target. Five factors govern the attractiveness of the segment:
■ Segment size.
■ Segment growth.
■ Profitability of the segment.
■ Current and potential competition.

■ Capabilities of the business.
In developing a segmentation strategy, management has several strategic choices.
Undifferentiated marketing
Here the firm ignores actual or potential differences among segments, and targets one
offer to the entire market (Figure 3.2). It designs a product and marketing mix that
will appeal to the mass market. In the early days of their industries, Ford,
Volkswagen, Coca-Cola, British Airways and Woolworth pursued this strategy. Coca-
Cola, for example, had one drink, in one bottle size, with one taste, and sold at one
price, which aimed to suit everyone.
Undifferentiated marketing
Company
Market marketing
mix
Differentiated marketing
Company
Segment 1 marketing mix 1
Company
Segment 2
marketing mix 2
Segment 3 Company
marketing mix 3
Focused marketing
Segment 1
Company
Segment 2
marketing mix 1
Figure 3.2 Segment 3

Alternative
marketing strategies
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The advantages of a single offer are economies of scale in production, distribution,

advertising, marketing and inventories. However, today two factors make undifferen-
tiated marketing strategies rarely optimal. First, as we have seen, customers are
increasingly heterogeneous in their needs. They differ in benefits wanted, purchasing
power, values, media and buying characteristics. For example, Coca-Cola is now sold
in as many as nine varieties and six sizes of bottle and can: that is, it offers a total of
up to 54 combinations. Second, even when needs are the same across segments, the
value that customers attach to an offer varies and so, as has been shown, the oppor-
tunities for profitable product and price discrimination exist.
Differentiated marketing
As with undifferentiated marketers, differentiators seek to compete across the major-
ity of the market, but here they do so with different offers. They develop different
products and marketing programmes for each segment of the market. They seek to
fine-tune their offers to the specific needs of each customer group and to capitalise
on value differences by charging different prices. Thus an airline segments its cabin
into different classes of customers; a whisky company sells higher-priced brands to
Japan than it does to Spain; expensive laboratory equipment is targeted at the phar-
maceutical industry rather than the jute industry.
Ultimately finer and finer segmentation leads to one-to-one marketing, whereby the
company retains information on each customer and interacts with them individually,
customising its communications and marketing mix.
Because differentiated marketing is better at satisfying disparate customers, it nor-
mally leads to higher average prices and greater sales volumes. But it also leads to
higher costs of production, marketing, promotion and administration. Management
has to choose the most profitable level of segmentation which balances the increas-
ing revenue that segmentation offers against the increasing costs that it incurs.
Focused marketing
Here the company does not aim to compete in the majority of the market, but rather
specialises in one segment, or a small number of segments. When the segment is
small, the company is often termed a niche competitor. Small companies generally
have no alternative but to pursue this strategy, since they lack the resources to com-
pete across the market.
A focused strategy permits the firm to achieve efficient production, distribution and
marketing through specialising its investments. It allows the business to build a
strong reputation from its expertise in understanding the specific requirements of
buyers in this segment. Also, by focusing it can build a strong share, making it the
preferred choice of buyers and distributors serving these customers. A well-focused
strategy permits a competitor to achieve both low costs and high prices.
Focused strategies, however, do have dangers and limitations in the long run. First, by
tying itself to the fortunes of one segment, the company incurs high risks. Jaguar’s
dependence on sales to the US luxury car market led to its collapse and acquisition by
Ford, when this segment declined during the recession of the early 1990s. Second, if
the segment is growing and profitable, it is likely to attract the attention of bigger com-
petitors. This is a particular danger when product life cycles shorten and companies
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have to invest heavily in new product development. Larger competitors can often
afford investments that smaller players cannot match, and they can transfer technolo-
gies from other segments to obtain leverage in cost and innovation.
Innovative segmentation
Market segments are not fixed. Instead continual opportunities for creating new prof-
itable segments are being opened by changes in the environment and new
knowledge. Environmental changes – rising incomes, demographic changes, fashion
and new concerns – continually create new customer needs. New knowledge and
technologies at the same time offer new opportunities to meet these needs. The
potential profit and growth opportunities that these represent mean that looking for
new ways to segment markets should be a top concern of managers.
For example, the airlines have conventionally segmented their cabins into economy,
business and first-class customers. The economy class is the largest and lowest-margin
segment. Virgin Atlantic noted that the economy class was in fact a very heterogeneous
segment. While the average seat price was €450 on an Atlantic crossing, some last-
minute and standby passengers were paying under €150, while other passengers were
paying full-fare economy tickets costing almost €750. Yet all economy-class customers
were in similar seats, receiving the same service. As a result, Virgin decided to segment
its economy class, creating a new ‘Premium Economy’ class aimed at full-fare economy
passengers. Virgin would make itself more attractive to this segment by offering a sepa-
rate ‘cabin’, better food, a separate check-in and other service enhancements.
Creating new segments that add new customers or trade up current ones is a regular
strategy pursued by expert marketers. Häagen-Dazs developed a premium segment for
ice-cream in the UK, selling at prices triple those for the mass market. Castrol devel-
oped a new segment in the US lubricant market, selling high-priced synthetic oil for
drivers of high-performance European cars. British Airports Authority has segmented
some of its car parks into tourist (€12 per day) and executive (€75 per day).
Segmentation over time

Opportunities for segmentation tend to increase as a market evolves. Industry-wide
sales statistics suggest, erroneously, that a market grows or declines uniformly. For
example, industry statistics show that mobile phone sales grew by 60 per cent per
annum during the 1990s. Cigarette sales in northern Europe, on the other hand,
declined by 3 per cent a year. But such broad trends are useless and even misleading
for the firm. A market grows (or declines) in three ways (Figure 3.3). The most obvious
way is by attracting new customers as they become aware of the product and are
incentivised to purchase it. But more important to the long-term growth of the market
is the attraction of new market segments, through the addition of different types of
customer both nationally and internationally. For example, in the early years, the
growth of the computer market was fuelled by more scientific customers being
attracted, but then sales really boomed when a second segment – large business organ-
isations – started using computers. Growth was further increased by the addition of a
third segment – small businesses. Later, households and then students began to be
attracted to the market. Figure 3.4 shows how a market grows by the addition of new
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Increase awareness
Convert non-users
(existing segment)
Incentivise purchase
Geographical
Market Create new

growth segments
New channels
New uses
Greater revenue
Heavier or more
from current
frequent use
customers
Figure 3.3
Sources of market Trading up
growth
market segments. The third way markets grow is by existing customers spending more
on the product. This occurs when new uses are found for it, people become heavier or
more frequent users, or they are encouraged to trade up to higher-priced models.
Sales
Total market
Market 3
segments
4
Figure 3.4
Market growth
through adding new Time
market segments
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Consequently, even in growth markets the firm must change radically to grow. It
must first shift resources out of maturing market segments into the new emerging
ones. This means learning about the new customers and developing new products
and distribution channels. Second, it must look to trade up existing customers, find
new uses or encourage more frequent application of the product by discovering new
means of adding value. Unless management explore these two avenues, the firm will
get trapped into declining, increasingly commodity-oriented segments. Analogously,
creative marketers can still find buoyant growth segments even in mature or declin-
ing total markets. In today’s highly fragmented markets, it makes more sense to talk
about growing or declining companies than about growing or declining markets.
Creating the differential advantage
The choice of target market segments determines where the business will compete.
But other firms will also be seeking to compete in these segments, and customers will
choose whom to support. The key task of management in competitive markets is cre-
ating a sustainable differential advantage to attract these choices. A sustainable
differential advantage is a perceived difference that leads customers in the target seg-
ment to prefer one company’s offer to those of others. The difference may be based
upon a product that is perceived as superior, has better service support or offers a
lower price. Where a firm creates a differential advantage, it achieves higher market
share and higher profits, and has the ability to defend itself against an attack from
competitors.
To be a sustainable differential advantage, any difference the firm obtains must meet
four criteria:
■ Customer benefit. The difference must be seen by customers as offering some impor-
tant benefit to them.
■ Unique. The benefit must be seen as not obtainable in a similar way from other
companies.
■ Sustainable. The advantage must be difficult to copy. There must be some barriers
to entry in the form of difficult-to-acquire skills, scale economies, branding or
patents, to prevent the differential being rapidly eroded.
■ Profitable. The firm must be able to offer the product or service with a price, cost
and volume structure that makes it profitable to produce.
Searching for a differential advantage begins with understanding what customers

value. To customers, value is the utility or total satisfaction they perceive the product
is offering, less the price to be paid for it, and less the other operating costs incurred
over the life of the product. For example, a company chairman may have agreed to
purchase an executive jet. In considering the options, the utility that any model is
seen to offer would be influenced by the plane’s size, the luxury of the fittings, range,
speed, perceived image and so on. Also taken into account would be the price of the
alternatives and what the company can afford to spend. The chairman is also likely
to want to compare the other ownership and operating costs, such as maintenance,
labour, insurance and depreciation. These ownership costs could easily exceed the
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price of the aircraft. The aircraft sales team will therefore need to research the factors
constituting the prospect’s utility function, price elasticity, and how important oper-
ating costs are rated in the buying equation.
The firm can create value for the customer by increasing the utility of the product (by
offering features that are perceived as superior), by lowering the price, or by cutting
other ownership costs. Higher ownership costs are normally a function of the prod-
uct’s design and so can be treated as part of the utility of the product. Higher
ownership costs reduce utility; lower ownership costs act to enhance the attraction of
the offer. The customer can then express choice in the equation:
Value = Utility – Price
Besides offering superior value to the customer, the differential advantage must also
be profitable to the firm. For the firm, the profit on a product can be expressed in the
simple equation:
Profit = Price – Cost
These equations, expressing value to the customer and profit to the firm, show that
there are three fundamental ways of creating a sustainable differential advantage.
First, management can find ways of increasing utility without disproportionate
increases in cost. Second, they can find ways of lowering costs without disproportion-
ately lowering utility. Third, they can seek a new positioning in the market with
different levels of both utility and price. The first two alternatives are discussed in
this section and the last in the next section.
Drivers of utility
Utility is a traditional economist’s word for the perceived satisfaction offered by con-
sumption or ownership of the product or service. In much of the management
literature it is often called ‘quality’. Utility, perceived quality or customer satisfaction
is always a combination of rational, economic factors and subjective image dimen-
sions. In industrial markets characterised by professional buying, economic factors
tend to dominate. Buyers choose sellers that they see as offering the most economic
value. In consumer markets, the image conveyed by the brand will commonly play a
major role. In services, the professionalism and empathy of the people representing
the supplier often determine choice.
The factors that drive up the utility of an offer can conveniently be divided into four
groups: product, service, personnel and image.
Product drivers
First, the physical product can be differentiated by design so that it is perceived as
better or cheaper to operate. The most important parameters for achieving a differen-
tial advantage are as follows:5
■ Performance. The level of the product’s primary operating characteristics (e.g.

speed, capacity, accuracy).
■ Features. The characteristics that are added to the primary function (e.g. a car can
be augmented by satellite navigation, entertainment system, climate control).
■ Reliability. The likelihood that the customer will have problems with the product.
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■ Conformance. The degree to which the product’s design and operating characteris-
tics meet expected specifications.
■ Durability. The expected working life of the product.
■ Operating costs. The costs of operating the product over its life (e.g. installation,
energy consumption, labour, insurance).
■ Serviceability. The facility with which a product can be repaired.
■ Aesthetics. How the product looks and feels to the buyer.
Services drivers
Services that augment the product have become increasingly important differentia-
tors as competition narrows product differences. The main service differentiators are
as follows:
■ Credit and finance. Grants, loans, terms and conditions can add to the product’s
appeal.
■ Ordering facilities. The ease or efficiency with which customers can order the product.
■ Delivery. The speed and effectiveness with which the order is delivered to the cus-
tomer. Generally people will pay more for a fast and reliable service.
■ Installation. The facility with which the product is put into working order for the
customer.
■ Training and consulting. Additional help and support offered to the customer.
■ After-sales service. The quality of its maintenance and back-up support.
■ Guarantees. Comprehensive guarantees may eliminate perceived purchase risks.
■ Operational support. A variety of services can be offered to reduce the customer’s

cost structure or enhance its marketing effectiveness.
Personnel drivers
Company personnel have become a valuable source of differential advantage, espe-
cially in service-oriented markets. High-quality personal service is difficult for
competitors to copy because it is so dependent upon the hard-to-change culture of
the company, and the skill of the management in empowering and motivating the
front-line staff. The key attributes of people who add value through personal service
are as follows:
■ Professional. They need the training to acquire the required skills and knowledge.
■ Courtesy. Customers expect politeness and consideration.
■ Trustworthy. Staff should be honest and credible.
■ Reliable. Customers want service that is accurate and consistent.
■ Positive. People want to deal with staff who believe they can overcome most practi-
cal difficulties.
■ Responsive. Staff should respond quickly to customer requests and problems.
■ Initiative. They should be capable of using their initiative to solve customer prob-
lems and not have to refer small matters to superiors.
■ Communication. Personnel need to be able to understand customers and provide
information to them effectively.
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Image drivers
The image of the company or its brand should be a major source of differential
advantage. Numerous experiments in many different product fields have shown that,
while in blind product tests customers cannot differentiate between alternatives,
once a well-known company or brand name is attached, they will not only choose
this brand, but also be willing to pay more for it. A strong image gives the customer
confidence in the product. This confidence value may be in the socio-psychological
utility of the brand or in its economic performance.
Socio-psychological confidence is created when customers perceive the brand as enabling
them to make a positive personal or social statement. For example, young people see
Coca-Cola, the Apple iPod and Nike running shoes as consistent with the lifestyles they
wish to express. Older people may turn to BMW cars, Rolex watches and Hermes
scarves. Economic confidence is achieved when a brand or company name creates an
image of reliability, performance or value. Many customers feel reassured by the Intel
label, the General Electric name or the Mercedes logo on a product.
The main approaches to creating value through image enhancement are as follows:
■ Reality. The best way of creating confidence in a product is by the previous three
factors – superior product performance, better services and top-quality personnel.
Confidence, and consequently image, are based primarily upon satisfaction with
using a company’s product and services and dealing with its people. Without the
reality of value being present, it is virtually impossible to create the image of it.
■ Advertising and related media. These can articulate, clarify and reinforce the brand
image or personality that the company wishes to present. Advertising and promo-
tion can speed up the recognition of a company’s real performance advantage.
They can make customers aware of the offer, understand it and eventually try it.
Other vehicles that help to convey and reinforce image are logos, colour, personal
endorsements, exhibitions, public relations and events.
Cost drivers
It is crucial for management to look for ways of lowering costs without lowering util-
ity. Some strategic thinkers postulate two alternatives open to the firm: competition
based upon cost and competition based upon differentiation. But this choice is artifi-
cial. Today a company needs both low costs and utility-enhancing differentiation.
Low costs permit the firm to create a differential advantage through either cutting
the price to customers, or investing more in product, services, personnel or image
improvements that offer them value, or both.
The first step is a cost analysis to determine the cost structure of the product or busi-
ness unit. Most costing systems are poor at allocating costs realistically to individual
business units, products and customers. Traditional accounting rules-of-thumb often
give a misleading picture of the true profitability of the different businesses. More
recently, activity-based costing has been introduced by more progressive firms to give
a better picture.6 Unless it allocates costs realistically, management lacks the informa-
tion rationally to improve efficiency.
Suppose a line of machine tools has the cost structure shown in Table 3.4 and generates
a profit margin of 5 per cent. The company will want to assess the competitiveness of
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Table 3.4
Revenue 100
Profit and cost
structure of a Purchased materials 25
business Manufacturing 15
R&D 5
Sales and distribution 15
Marketing 15
Central overheads 20
Profit margin 5
its cost structure and how its costs could be brought down without sacrificing the qual-
ity of its product, service and image. Whether a company’s costs are higher or lower
than its rivals depends upon where it stands in relation to the following cost drivers:
■ Economies of scale. Larger-volume competitors have the opportunity to operate at

lower costs and to amortise fixed expenses such as R & D and advertising over a
greater sales level.
■ Experience. Cost can decline over time due to learning that increases the firm’s efficiency.
■ Capacity utilisation. Firms operating their activities at full capacity will have lower costs.
■ Linkages. The level of certain costs can be influenced by other costs. For example, a
company might spend more than competitors in purchasing high-quality materi-
als, but this might be more than offset by lower manufacturing and service costs.
Higher costs in one area therefore do not necessarily mean inefficiency.
■ Interrelationships. Where a product or a business unit shares costs (e.g. R & D,
ordering processes) with sister units, costs can be reduced.
■ Integration. Vertical integration, where the firm undertakes tasks normally done by
outside contractors (e.g. transportation), may lower total costs.
■ Timing. Being first in the market may give rise to a cost advantage. It is often
cheaper to build a brand name at the start, and early experience may give subse-
quent cost advantage.
■ Location. Different operating bases also affect the relative cost of labour, manage-
ment and materials.
■ Institutional factors. Tax rates, trade union practices, local content rules and govern-
ment regulations can all affect the relative cost advantage of the business.
■ Marketing strategy. The utility-enhancing factors that the firm employs will also
influence its costs. If it is adding multiple product features and value-added serv-
ices, it will have higher costs that it anticipates recouping by higher prices or
greater volume.
Value chain
One of the most useful tools for analysing utility and cost drivers and the relationship
between both is the value chain. The value chain describes how the activities of the
business contribute to its tasks of designing, producing, delivering, communicating and
supporting its product. The value chain of a business (Figure 3.5) consists of two types
of activity that create value for customers. The primary value activities consist of bring-
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Firm infrastructure
Human resource management

Support
Ma
activities
r gin
Technology development
Procurement
Inbound Operations Outbound Marketing Service

logistics logistics and sales
Ma
r gi
n
Primary activities
Figure 3.5 Source: Reprinted with permission of the Free Press, a division of Macmillan, Inc., from Michael E. Porter,
Competitive Advantage: Creating and sustaining superior performance, p. 6 Copyright © 1985 by Michael E. Porter
The value chain
ing materials into the business, transforming them into products, distributing them,
marketing and servicing them. The support activities underpin the primary activities by
providing the purchased inputs, developing the technology used in the product and
processes, hiring, developing and motivating the firm’s personnel, and producing the
infrastructure activities such as general management, finance and planning.
Each of the nine elements of the value chain can be a source of differential advantage.
Management needs to compare its value chain to those of its competitors. Managers
can then analyse, first, whether costs can be reduced through cutting out non-value-
adding activities. An analysis should reveal which value-added stages represent the
largest potential of total cost. Obtaining a cost advantage in a key value-added stage
can mean a significant competitive advantage, whether that advantage is used to sup-
port a low price or stronger differentiation. In the example of Table 3.4, cutting central
overhead costs by 10 per cent suggests a profit margin increase of 40 per cent.
However, such crude cuts make the dangerous assumption that these costs do not add
value. In a company such as Nike, for instance, the technical and buying skills in head
office represent the company’s core advantage, and arbitrary cuts would threaten its
long-term competitiveness. Therefore careful analysis is necessary to judge whether
cost differences are due to quality drivers or differences in relative efficiency. The value
chain may also suggest how the business might be reconfigured to boost customer sat-
isfaction without adding to costs. For example, Nestlé found that its large food plants
were increasingly unable to meet the demands of supermarket groups for rapid
response, small runs and greater product and packaging variety. By restructuring into
smaller-focused factories, it was able to achieve both lower costs and higher satisfac-
tion ratings from customers for its greater flexibility and speed of response.
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In recent years, companies have extended this analysis to the concept of supply
chain management. Supply chain management aims to reduce costs and increase
quality by looking not just at the company’s value chain, but at those of suppliers,
distributors and ultimately customers too. Here the company seeks to create channel
partners with which it can tailor a total customer value-delivery system that guaran-
tees stringent standards for quality, on-time delivery and continuous improvement
in costs and performance.
Positioning strategy
It has been shown how a business can offer superior value by strategies that add value
or reduce costs. The third way to enhance its competitiveness is through positioning
itself more effectively. Positioning strategy is the choice of target market segments,
which determines where the business competes, and the choice of differential advan-
tage, which dictates how it competes.
A product or business unit may be inadequately positioned for three reasons. First,
the segment in which it is targeted might have become unattractive because it is too
small, declining, too competitive or otherwise unprofitable. Second, positioning
might be inadequate because the quality and features that the product offers do not
appeal to the segment to which it is targeted. Third, it might be wrong because the
product’s costs are too high to allow it to be priced competitively.
Figure 3.6 illustrates the structure of a typical market made up of four segments.
Product X is inadequately positioned because it is too costly for the mass market and
has insufficient perceived quality to appeal to the premium or luxury segments. The
business has several repositioning options. The first two might be termed ‘real’ repo-
sitioning; the remainder are ‘psychological’ repositioning strategies:
■ Introduce new brand. After the declining price of personal computers in the 1990s
threatened to oust IBM’s high-priced machines from the market, the company
introduced its own cheap ‘clone’ under the Ambra brand name and sourced from
the Far East. The objective was to maintain a foothold in the booming mass and
economy markets.
■ Change existing brand. Alternatively, a company may change its cost and utility
combination to make it more appealing. In contrast to IBM, Compaq tried to solve
the problem by cutting its prices and simplifying the features offered to hold on to
a position in the mass market.
■ Alter beliefs about the brand. Chivas Regal Scotch whisky achieved some success in
repositioning itself from the mass market to the premium segment, so rationalis-
ing its higher price.
■ Alter beliefs about competitive brands. The Body Shop retail group succeeded in
implying that the beauty and personal care products of competitors were not envi-
ronmentally friendly.
■ Alter attribute importance weights. Volvo raised the importance of safety as an
attribute in choosing a car, so enhancing the value of its differentiation.
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The marketing plan
Quality
Luxury
Premium
Mass
market Product X
Economy
Figure 3.6
Repositioning in a Cost
segmented market
■ Introduce new or neglected attributes. Unilever successfully introduced Radion, a

new detergent that eliminated odours – a benefit previously not considered impor-
tant by consumers.
■ Find a new market segment. When Dunhill diversified away from smoking acces-
sories into the men’s clothing market, rather than entering the already highly
competitive segments, it created a new luxury segment of very expensive, high-
quality ready-to-wear suits. As the only ‘typically British’ competitor in this
segment, it brought a unique brand with a strong appeal to affluent executives
(especially Japanese!).
The marketing plan
It is essential to formalise these decisions into a marketing plan. The plan communi-
cates the objectives and strategy to the management team and permits a rational
debate about the potential and chances of success. Marketing plans should be made
at several levels in the business: for the company as a whole, for the divisions, for the
business units, and at the product and market levels. The next chapter discusses the
higher-level plans. This section summarises the basic building blocks of marketing –
the marketing plans for the individual products or target market segments. A market-
ing plan consists of seven integrated components:
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1 Background situation
(a) Current performance
(b) Background analysis
(c) Opportunities and options
2 Marketing objectives
(a) Marketing objectives
(b) Financial objectives
3 Marketing strategy
(a) Target market segments
(b) Differential advantage
4 Marketing mix
(a) Product
(b) Price
(c) Promotion
(d) Distribution
(e) Services
(f) Staff
5 Action plans
6 Budget
7 Organisational implications.
Background situation
The starting point of the plan assesses the health of the product or its position in a
segment. It focuses on three questions. How well is it performing now? What factors
have led to the current success or failure in the market-place? Where is the business
heading – do things look likely to improve or get worse? These questions are
answered under the following headings.
Current performance
The two key measures of the health of the business at this level are marketing and
financial results. Marketing performance is revealed in the sales and market share fig-
ures. Financial performance is shown by the performance of total profits, gross and net
margins, return on capital employed and cash flow. These measures should be com-
pared against major competitors and over the past five years. The results should be
segregated by line of product and type of customer to exhibit the winners and losers
in the portfolio. This section should conclude with a clear, unambiguous statement
about whether current performance is good or bad, satisfactory or unsatisfactory.
Background analysis
This section falls into two parts. The first accounts for current performance – how did
we get here? The second seeks to project future performance on current assumptions
about the environment and the policies of the business – where are we heading?
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The marketing plan
Current performance has been determined by environmental changes affecting the

market and by the effectiveness of past decisions taken by management. The back-
ground analysis should try and divide the explanation of current performance into
these two components.
Environmental changes can again be split into macro- and micro-environmental
changes. Macro-environmental changes refer to the broad shifts in economic condi-
tions, demographics, technological, cultural and environmental forces that may have
influenced performance either positively or negatively. For example, consumer
durables and capital goods are strongly affected by the economic cycle.
Micro-environmental changes are those shifts that are specific to the market in which
the business operates. In this section, the product or market manager will analyse the
effects of changes in the behaviour of customers, distribution channels, competitive
strategies, new products, prices and costs.
The environmental forces are largely outside the control of the firm. They are
changes to which the business must adapt. The second set of factors that will have
shaped current performance are the results of decisions that management took in the
past. These include the objectives chosen, the strategies employed, and the product,
price, promotion and distribution tactics. How appropriate were these decisions and
how effectively were they implemented? Which of them were the critical factors in
determining today’s results?
The second part of the background analysis is to project a scenario of how the macro-
and micro-environment of the business is likely to change, and to consider the impli-
cations. Then the appropriateness of the current goals and strategies of the business
are assessed. The objective is to come to a conclusion about how bright the future of
the business looks.
Opportunities and options

After describing the current situation and assessing the implications of the external
and internal changes taking place, management should conduct a SWOT analysis.
This requires listing and analysing the main strengths of the business, its weaknesses
and the likely opportunities and threats it will be facing in the future.
The next task is to identify clearly the key issues or options available to the business.
Management will want to look at avenues which exploit the strengths and pursue the
opportunities that have been identified. At the same time, they may wish to take
action to counter the threats and weaknesses that have been perceived in the business.
Options to be explored might be: shifting into a new market segment, adding new
products, boosting service and quality levels, or diversification into other markets.
Marketing objectives
There will be two sets of objectives in the marketing plan: marketing and financial.
■ Marketing goals. The plan should have a clear sales goal. In addition, it is impor-
tant to specify a market share target, since in high-growth markets adequate sales
growth can disguise declining market share performance. Sales and share are the
primary marketing objectives, but it is also useful to have intermediate goals cover-
ing customer satisfaction, loyalty, communications and distribution. These might
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include achieving target satisfaction scores, repurchase rates, certain awareness

levels, target trial levels and aims for specific penetration levels among retailers
and distributors.
■ Financial goals. The primary financial objectives will be profits, return on invest-
ment and cash flow. It is useful to break these down into convenient indices such
as gross margin, return on sales, stock turnover and other managerial ratios that
highlight important efficiency characteristics of the business.
It is important to set objectives because they can provide targets to stretch the
endeavours of the management team and prevent complacency. They can also pro-
vide the means for evaluating the performance of a business and those who run it. To
provide these benefits, however, the objectives need to meet certain criteria. First,
they must be strategically relevant and consistent. For example, it would not gener-
ally make sense to have both ambitious sales growth objectives and high short-term
cash generation targets for a new product. Second, the target should be reasonable.
While it is important to set objectives that stretch management, they will not be
motivating unless they are seen as attainable. Third, they should be measurable and
unambiguous. For example, when the objectives are to be achieved should be made
clear. Finally, they should be based upon reliable data. Many accounting systems allo-
cate costs across products in ways that do not reflect their true loadings. For example,
overhead costs often get allocated as a percentage of sales rather than as they are
incurred. Such biases usually have the effect of undervaluing the gains made by suc-
cessful products and disguising the true costs of poor ones.
Marketing strategy
The strategy to achieve the objectives is built around two cornerstones: the choice of
target market segment or segments; and the choice of the differential advantage.
These two comprise the positioning strategy of the business or the brand.
■ Target market segment. Here the plan will identify what types of customer the busi-
ness is to aim for. The presentation will analyse their needs and profiles: what the
customers expect, where they are, how and when they buy, and how they use the
product.
■ Differential advantage. The plan will describe the competitors and their strategies,
and present the company’s own core strategy that will lead target customers to
prefer and purchase its offer.
A clear statement of this positioning strategy is crucial because it defines all the ensu-
ing decisions that implement the plan.
Marketing mix
The marketing mix is the set of marketing decisions that management makes to
implement its positioning strategy and achieve its objectives. These have popularly
been termed the four Ps: product, price, promotion and place (i.e. distribution).
Nowadays most managers would add two more decisions: service and staff. Each of
these decisions is essentially a category under which a bundle of sub-decisions are
needed. The main headings are as follows.
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Market-centred organisations
Product decisions
■ Product variety ■ Product presentation
■ Product performance ■ Product packaging
■ Product features ■ Sizes
■ Product design ■ Brand name
Pricing decisions
■ List price ■ Geographical pricing
■ Discounts ■ Payment terms
■ Allowances ■ Credit terms
Promotion
■ Sales force ■ Consumer promotion
■ Advertising ■ Trade promotion
■ Public relations ■ Direct marketing
Distribution
■ Channel selection ■ Distribution directness
■ Market coverage ■ Density of distribution
■ Channel variety ■ Dealer support
Services Staff
■ Pre-sale services ■ Support staff
■ Point-of-sale services ■ Staff motivation
■ Post-sale services ■ Tasks and responsibilities
Action plans
These should specify the details of implementation. For each of the decisions, the
action plan should state who is responsible, when it will be done, and how much it
will cost. This often takes the form of a calendar that schedules the necessary activi-
ties to achieve the results in the most effective manner.
Budget
The final step is to develop a budget that projects the revenues, expenditures, profits
and cash flows over the planning period. Top management can then evaluate
whether the plan is sufficiently ambitious, whether the expenditures are reasonable,
and the nature of the risks involved.
Market-centred organisations
To make a marketing strategy work, the business needs to put together an organisa-
tion that encourages people to develop the necessary expertise and commitment. In
the past, organisational activities have been structured around functions or division-
alised around geographical or production units. However, if the focus of the business
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is on marketing – meeting customer needs, implemented by clear segmentation and

positioning strategies – a different type of organisation is called for. The most obvious
way of structuring activities is around customers, markets and market segments.
The problem with functional and other types of divisionally based organisation is
that they are not oriented to building up knowledge about customers; nor do they
assign clear responsibility for meeting their needs. Building a market-centred organi-
sation requires the firm first to define its key customers or target market segments
and then to organise product development, operations, marketing, sales and distribu-
tion around each of these segments. The aim is to build small, dedicated
organisations committed to understanding and meeting target customer needs better
than competitors.
For example, the Burton Retail Group initially had one women’s wear business.
Then to boost its market position it decomposed the market into six lifestyle seg-
ments. Each segment was given its own management board, and its own buying
and marketing organisation charged with developing a profitable positioning strat-
egy. Each market-centred business unit developed its own shop formats, marketing
plan, pricing and promotional platform. Similarly, Hewlett-Packard moved from a
product-based division structure to one organised around market segments. It built
new business units capable of selling any of the H-P products to specific customer
groups such as health care, financial services and engineering. An organisation can
be market centred at several levels. The most complete form is the autonomous
market-centred division, where the market segment forms the profit centre. At
Burton’s, for example, the market segment manager had total autonomy and profit
responsibility. In this type of organisation, production and R & D must become
market focused or they will not be given any business by their internal customers.
A less radical approach adopted by H-P and many companies is to reorganise the
sales force around market segments. A further step is to create a separate marketing
organisation for each of the major segments. These can research individual markets
and develop appropriate strategies. Another increasingly popular option is team-
based organisations, whereby personnel from manufacturing, R & D and marketing
are assigned to taskforces aimed at capitalising on opportunities presented by spe-
cific markets.
Organising around customers and markets can offer several advantages. First, it
focuses managers and employees on what really counts – satisfying the needs of
target customers. Second, the benefits increase as customers shift from buying com-
modity products to wanting value-enhancing solutions made up of several product
and service elements. Third, it encourages innovation and value-added offerings by
creating expertise in the understanding of the operations, problems and changing
market environment of the buyer. Fourth, it stimulates teamwork and reduces func-
tional conflict by providing a common focus through which specialised inputs can
be directed.
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Questions
Summary
Marketing has two meanings. First, it is a business philosophy which states that the
central goal of the company must be to meet the needs of customers. Without this the
firm cannot survive and prosper in competitive markets. The second idea of marketing is a
distinct group of activities centred around market segmentation and positioning
decisions.
Capitalising on market opportunities requires several steps. First, it requires segmenting
the heterogeneous markets open to the firm and understanding the needs of the
separate customer groups. Segmentation is the key to marketing because it offers the
firm the chance to meet customer needs more effectively and so build sales growth and
profits. Market segments are not static, but offer continual opportunities for innovation
and marketing creativity.
After choosing its target market segments, the business has to create a differential
advantage. All segments are, or become, competitive and the firm must create a reason
for preference. A differential advantage can be based upon an offer that provides higher
utility or which is lower in price. To build a differential advantage, management needs to
understand what drives customer satisfaction and what drives the costs of meeting their
requirements.
Finally, management must know how to put together marketing plans and market-centred
organisations that are capable of translating strategy into actions.
Questions
1. The high street banks have traditionally not segmented their markets or developed
discrete positioning strategies for the different segments. Do you think segmented offers
would make sense for the banks? How could such a strategy be operationalised?
2. Is it possible for one petrol station to charge higher prices for petrol than its neighbouring
competitors?
3. What are the benefits of market segmentation for the business?
4. A commercial vehicle business is seeking to ‘reposition’ its major product. What does this
mean and how might it be done?
5. Show how the ‘value chain’ of a customer can be used to provide insights for
segmentation and positioning.
6. What are the major components of a marketing plan for a product or target market?
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Notes
1. Don Peppers and Martha Rogers, Enterprise One-to-One: Tools for competing in the interactive age
(New York: Doubleday, 1999).
2. Dell’s segments are home, small business, medium and large business, large corporate and
public sector. The ways they address these customer groups differs slightly by geographic
market. A visit to www.dell.com demonstrates these differences.
3. David A. Aaker, V. Kumaran and George S. Day, Marketing Research, 7th edn (New York: Wiley,
2001).
4. Louis L. Schorsch, ‘You can market steel’, McKinsey Quarterly, January 1994, pp. 111–20; V.
Kasturi Rangan, Rowland T. Moriarty and Gordon S. Swartz, ‘Segmenting customers in
mature industrial markets’, Journal of Marketing, October 1992, pp. 72–82.
5. David Garvin, ‘Competing on the eight dimensions of quality’, Harvard Business Review,
November–December 1987, pp. 101–9.
6. Robin Cooper and Robert S. Kaplan, The Design of Cost Management Systems (Englewood
Cliffs, NJ: Prentice Hall, 1991).
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‘Only the paranoid survive.’

Andy Grove, Ex-Chairman,
now adviser to Intel
Chapter 4 STRATEGIC MARKET PLANNING
Strategic market planning is concerned with adapting the organisation to a changing

environment. Organisations succeed when they meet the needs of customers more
effectively than competitors. The problem is that the needs of customers change, new
technologies appear and competitors generally get better. As a result, successful
companies decline if they do not continually change and adapt. To maintain success,
organisations must have strategies to reposition themselves in the market, to move into
new markets and to develop new products.
This chapter discusses how strategic market planning facilitates the company’s ability to
adapt to a changing and increasingly competitive world. It shows how accelerating and
often unpredictable environmental change is requiring new techniques for strategic
planning. It explores the components of an effective strategy and shows how strategic
market planning is used, first at the corporate level and then at the level of the
business unit.
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Chapter 4 Strategic market planning
Adapting to change
Success in business is achieved when management develops a strategy and an organi-

sation that optimally fit the environment within which the firm operates. In this
situation it offers customers products and services that match their needs better than
rival companies. Unfortunately, needs change and competitors develop new products
and technologies that create added value. As a result, for most companies, success is a
temporary phenomenon. Companies that were once held up as management icons,
such as General Motors, Marks & Spencer, Sainsbury, Hanson Trust, Saatchi & Saatchi
and Body Shop are, a few years later, struggling for their very survival. Their failure is
due to the inability of their managements to adapt to change. Such companies are
leapfrogged by new competitors with strategies, technologies and organisations better
tuned to delivering value to today’s customers.
Environmental changes are of two broad types: continuous and discontinuous. The
former are those changes that are slow and fairly predictable. Demographic changes,
increasing concern for the environment, and problems of growing congestion on the
road are examples of such clearly discernible trends. With this type of change,
affected organisations should have the time to adapt to the problems or opportuni-
ties that are being created. But today change increasingly appears to fall into the
discontinuous category. Many of the changes in the environment appear sudden,
dramatic and unpredictable. Such an environment is fundamentally more difficult to
plan for and to adapt to. In this world, flexibility has become a more important
organisational strength than forecasting skill.
Strategic windows
When sudden environmental changes occur, they can trigger major developments in
markets. These shocks are often termed strategic windows, infliction points or paradigm
shifts.1 When a discontinuous change in a market occurs, the existing market leaders
are ill-equipped to match the new requirements. New contenders can go through the
open ‘window’ and displace the current players. In these situations, the major chal-
lenge facing the current leaders is to ‘close’ the strategic window before the new
contenders can establish themselves. The task of the newcomers is to pass through
the open window fast and effectively before it is closed against them.
The major causes of strategic windows opening are as follows:
■ New technology. A new technology can rapidly make obsolete the key strengths of
current market leaders. For example, Ever Ready dominated the small battery
market until Duracel used lithium technology to replace conventional zinc cells.
The new batteries had operating lives two or three times those of Ever Ready,
whose market share collapsed.
■ New segments. A new market segment offers a window to new players if the cur-
rent competitors are not alert to its significance. The British motorcycle industry
was destroyed in part by its failure to identify and capitalise on the sudden emer-
gence of a leisure segment in the late 1960s – people buying motorcycles for fun
rather than basic transportation. The rapid growth of the leisure market in the
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Adapting to change
more affluent western countries provided a strategic window for Honda that it
exploited to achieve industry dominance.
■ New channels of distribution. As a market evolves, the sudden emergence of new
channels can create strategic windows. Dell swept into leadership in the computer
market in the 1990s by pioneering direct sales over the Internet and telephone.
This allowed it to undercut IBM and Compaq, which employed conventional
high-cost retail channels, and to add value by customising products to individual
requirements.
■ Market redefinition. As markets develop, the nature of demand sometimes changes
from buying products to buying service systems. For example, Docutel initially
dominated the market for automatic teller machines (ATMs). Then the banks
began to look to integrate their electronic funds transfer systems. This opened the
window to the major computer companies such as IBM and Burroughs, which
could offer a total package (including ATMs). Docutel was ousted from the market
because it lacked the new system capabilities. Once the system capabilities became
standardised and modular the existing players lost position to NCR which devel-
oped a stand-alone PC-based ATM with full up-grade potential and has continued
to dominate the market since the early 1990s.
■ New legislation. New laws, regulations, privatisations and international agreements
present strategic windows. The break-up of government monopolies in, for exam-
ple, telecommunications has opened up long-protected markets to fierce new
competition.
■ Environmental shocks. Sudden, unpredicted changes in commodity prices, currency
alignments, interest rates or political events can produce dramatic changes in
market positions. The attacks in the US on 11 September 2001 caused a number of
shocks to the world economic system and to the travel industry in particular
which are still being felt after five years.
Lags in response to environmental change

Why have market leaders often reacted so slowly to events? Figure 4.1 illustrates the
nature and causes of these delays in responding to strategic windows.2 Four categories
of lags can fatally delay change. First is the observation delay (A1 – A0). Often it is
months before managers notice that sales are sharply declining. Frequently they are
monitoring trade orders rather than consumer off-take. For seasonal goods, trade
reordering can lag behind sales performance by six months or more. Also in fast-
growing markets, sales can be growing while market share is declining – an example
of this phenomenon was the growth of the first generation of anti-ulcer drugs.
Tagamet, the first to market, failed to respond to the challenge of Zantac, a follower
brand, because management was focused on sales volume and failed to realise that its
competitor was growing much more quickly. Second is a procrastination period (A2 –
A1). While the front-line management knows that there is a major problem, it often
lacks the power to do anything about it. Power in these bureaucracies lies with senior
managers, who often have only a distant understanding of current marketing and
technological issues. A lack of detailed knowledge adds to the delay and uncertainty.
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Cost of response Investment

A5
Shift in thrust
Observation delay
Procrastination
Retrenchment
Power shift
A0
A1 A2 Time
A3
A4
Operating loss
Crisis level
Operating loss
Figure 4.1
Lags in response to
environmental
Source: Adapted from H. Igor Ansoff, Strategic Management (London: Macmillan, 1979), p. 177
change
Psychologically, too, people are averse to change. Change makes existing skills and
assets obsolete, threatening careers and organisational power. As performance
approaches the crisis level (A3), management is forced to react. Normally, the
response is retrenchment (A3 – A2). The management seeks to check losses by cutting
costs and investment. But for a strategic window, retrenchment is exactly the wrong
response: the problem is not efficiency but effectiveness. The company’s losses are
caused not by doing things wrong, but by doing the wrong things. It is stuck in yes-
terday’s technologies, products or channels. Finally, with the failure of the
retrenchment policy, if the business is to survive, a power shift (A4 – A3) is necessary,
leading to the ousting of the management team responsible. If the new team is to be
effective, it needs a shift in thrust to invest in the new strategies that enable the busi-
ness to adapt to the changed environment.
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Adapting to change
Reducing the lags in strategic response

Strategic market management is concerned with accelerating the shift in thrust neces-
sary to adapt to environmental changes. In Figure 4.1 this means moving point A4
(where the required management response is made) to the left. Each of the response
lags needs to be truncated or eliminated. Four complementary sets of actions are
required, each of which attacks one of the lags.
Effective management information systems

Observation delays are cut by quick feedback on customer behaviour. For example,
modern retailers have scanning systems that alert management within hours to
unanticipated changes in sales. The Internet and other developments in information
technology have given firms the capabilities to identify and respond to market
changes much more rapidly. The quicker strategic windows are flagged, the faster
management can respond.
Enhanced strategic capabilities

To reduce procrastination, decisions have, as far as possible, to be devolved to man-
agers close to the front line. Managers need to be customer rather than product led.
They need broader horizons to scan the environment for signals of changes in tech-
nology, channels or customer expectations. Top management has to imbue an
expectation of change and impermanence, and to encourage an aspirational culture
that seeks to capitalise on opening strategic windows.
Corporate flexibility
Change threatens companies because revenues fall faster than costs. Consequently,
one obvious move to cope with managing in a turbulent environment is to seek to
restructure the business with the objective of making fixed costs variable. Where a
company can buy in component products and services, rather than make them, it
has a self-righting mechanism that reduces its downside risk. This is one of the rea-
sons for the enormous growth in out-sourcing in recent years (see Box 4.1).
Out-sourcing also reduces risks. Rapid technological change and fickle consumers
mean firms can fall out of favour fast. Contracting out manufacturing is less risky
than investing in expensive factories. Contractors also allow their customers to con-
centrate on what adds the greatest value these days: innovation and branding. Some
see industries ‘vertically disintegrating’ – traditional firms will focus on R & D and
marketing; manufacturing will be a service provided by global suppliers.
Flexibility can also be enhanced by diversifying the organisation’s portfolio of prod-
ucts or markets. This way it can spread its risks and not have all its eggs in one
basket. The need for faster response also encourages organisations to find more
dynamic, less bureaucratic leaders capable of making quick, dramatic moves. Finally,
it also encourages companies to move beyond annual budgeting and planning sys-
tems to the new type of strategic market planning described below, which stimulates
management to probe and respond to change.
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Box 4.1 The growth of out-sourcing FT
One of the world’s fastest growing industries is contract manufacturing. Increasingly innovative companies
want to contract out their manufacturing and focus on where they believe they add the most value – design,
development and marketing. Contract manufacturing is growing in many sectors – clothing, toys, brewing
and electronics. It is also a feature of service industries where innovative firms such as Virgin or Tesco can
enter markets like banking, financial services and telecommunications relying on traditional suppliers to
provide the capacity and ‘products’ they sell.
Nike is a high profile exponent of contract manufacture recently attracting political criticism for the
conditions of employment for the 10,000 workers in the 800 factories used to make the Nike range.
Electronics has proved a fertile area for contract manufacturing where such companies as Cisco, Dell, HP,
IBM and Ericsson out-source most of their production to big contract manufacturers such as Flextronics,
Solectron, and Sanmina-SCI. Flextronics based in Singapore had revenues of over US$14bn in 2004 and
the other two based in California each had revenues greater than US$10bn.
The Internet has greatly facilitated contract manufacturing, allowing customers to virtually integrate with their
suppliers in real time. Contract manufacturers also usually produce at lower cost. Assembly increasingly shifts
to complex and expensive robotic technology. Contract manufacturers have the experience and volumes to use
robots more efficiently. They also get huge volume discounts from component suppliers. Out-sourcing also
allows customers greater flexibility and the ability to get products to market faster. Big contract manufacturers
such as Flextronics have dozens of factories around the world. They can ramp up production rapidly. If demand
in one market surges, they can literally fly in an entire production line from somewhere else.
Source: Financial Times, 27 September 1995, 20 April 2005
Rapid power transfers

Radical changes in the company’s markets and technological needs often make obso-
lete the competences of the existing management. When this power shift becomes
necessary, it should be done quickly rather than endure further destabilising delays.
This is why a company requires a strong, independently minded board, with non-
executive directors who can take the lead in bringing in a new executive team.
Turbulent environments also make management development a key priority – having
a pool of emerging talent able to take over the leadership of change.
Evolution of planning systems
Leading companies have adapted their planning systems over the years, as their under-
standing of environmental change has grown (Table 4.1). The earliest planning systems
were financial and based upon an annual budgeting cycle. They focused on controlling
costs. The acceleration of growth and change in the postwar years led to more of an
external focus and a greater concern with projecting trends and anticipating the opportu-
nities being created. This was the era of long-range plans. Subsequently, the energy crises
of the 1970s appeared to trigger a new era of risk and unpredictability for organisations.
Strategic planning was concerned with developing a detailed understanding of this new
market environment, so that these new patterns could be predicted and responded to.
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Evolution of planning systems
Table 4.1 Evolution of strategy and management systems
Characteristics Financial Long-range Strategic Strategic Strategic market

planning planning planning management management
Management Budgets and Anticipate Respond to Internal and Capitalise on

focus control market growth environmental external strategic windows
changes
Assumptions Long-run stability Past trends New trends and Market and Many changes will
to continue discontinuities competitive be sudden and
are predictable evolution follow unpredictable
rules
Objective Meet the budget Predict the Think Optimise Create
future strategically competitive opportunities
position through change
Planning Annual 5 years, Annual revisions Annual revisions Real time
process annual revisions
When popular Until late 1950s 1960s 1970s 1980s and after 2000 and after
The new approaches to planning did not replace previous systems, but rather they
augmented them. Budgets and long-term plans co-existed and integrated with the
new strategic planning approach. All three approaches were usually based on the
annual planning process. Long-range plans and strategies were generally updated in
the first half of the year and these then provided the foundation for developing the
operating plans and budgets for the individual businesses and markets. For example,
General Electric’s planning cycle is shown in Figure 4.2.
The current approach, termed strategic market planning or strategic market manage-
ment, differs in two respects from these earlier approaches. First, this new approach
focuses much more directly on the firm’s market opportunities and seeks to create
change by identifying and exploiting strategic windows or paradigm shifts. Second, it
Month: Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Resource
Strategy Budget
Corporate Issues allocation
review approval
level priorities
Strategy SBU strategic Budget SBU

guidelines plans guidelines budgets
Figure 4.2 SBU-level Strategy Programmes

General Electric’s activity development and budgets
strategic planning
cycle
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recognises that many changes must be agreed and pursued outside the normal plan-
ning cycle. It emphasises reducing the lags in response to environmental change and
using turbulence to the company’s advantage.
The hierarchy of strategies

Most companies will not have a single strategic plan, but they will have a number of
integrated strategies set at different levels. Typically, a large company will have a
corporate strategy that sets the broad direction for the company as a whole. The com-
pany will normally consist of a large number of different businesses that are usually
grouped into divisions. These divisions, which will be either regional groups or groups
of related product businesses, will develop strategies for their areas of responsibility.
Reporting into the divisions will be businesses – normally either country units or
businesses providing a line of related products. Finally, each business will have a col-
lection of individual products or markets, each of which needs to be planned. The
description of product-market or functional plans was covered in Chapter 3.
Components of strategy
Strategic market planning can be defined as the managerial process of developing
and maintaining a viable fit between the firm’s strategy and organisation and its
changing environment. A well-defined strategy incorporates decisions about the fol-
lowing issues:
■ Scope of the business. Scope refers to the choice of products that the firm will pro-
duce, the markets it will serve, and the level of vertical integration it will pursue.
Decisions on scope are based upon management’s view of the organisation’s mis-
sion or strategic intent. Management answers the questions: what business are we
in; and what business do we want to be in?
■ Objectives. The strategy should also identify the firm’s primary stakeholders, estab-
lish performance criteria and define what levels of attainment the firm will seek on
these criteria.
■ Strategic business unit identification. Most companies operate with a diversity of
products, technologies and market segments. Management needs to structure the
organisation into identifiable business units with managers clearly accountable
and responsible for their performance.
■ Resource allocation. A central strategic task is to allocate the resources of the firm
among the business units and then among product-markets, functional depart-
ments and activities within each business.
■ Developing sustainable differential advantage. The most important strategic objec-
tive is to achieve a sustainable competitive advantage that makes the business the
preferred choice for a significant number of customers.
■ Effective functional strategies. The competitive strategy needs to be activated and
implemented by efficient and effective functional policies. These include policies for
manufacturing, positioning, the product line, pricing, promotion and distribution.
■ Synergy. While the firm operates separate strategic business units, management
should look for synergies: resources and capabilities that complement and
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Corporate strategy
reinforce one another. Unless such synergies are identified and exploited, a busi-
ness unit within a large successful company will have no advantage over small
firms. Potential synergies may lie in umbrella brand names, shared distribution
and logistics, or access to special development and managerial skills.
Corporate strategy
At the top of the hierarchy of strategic plans is the corporate plan. Companies differ
in the extent to which they develop detailed strategic plans centrally. Goold,
Campbell and Alexander identified three broad styles.3 Strategic planning companies
have headquarter teams undertaking detailed planning. The centre takes the initia-
tive in developing strategies to build long-run competitive advantage, to make
individual businesses grow, and to identify and develop synergies among them. They
generally have matrix structures, with centralised product managers responsible for
developing global strategies. Companies that have these proactive centres include
IBM, Cadbury-Schweppes, Unilever and Electrolux.
At the opposite end are the financial control companies. Here the centre is very small
and does not get involved in the strategies of its business units. Instead headquarters
sets stretching and tightly controlled profit and cash requirements for each of its
businesses, which it runs like a holding company. Managers are held personally
accountable for achieving the targets – how they do it is their responsibility. Such
companies invariably have short time horizons, expect quick payback and grow via
acquisition rather than internal development. Examples of these financially led com-
panies have been Hanson Trust, BTR and GEC. Financially driven conglomerates like
Hanson Trust and BTR have given way to private equity funds such as KKR,
Blackstone, Apax and Candover. These vehicles acquire lacklustre businesses with a
view to reinvigorating their performance and recovering their investment along with
a significant return through flotation with a timescale of between three and five years
on average.
Strategic control companies fall in between these two extremes. Primary responsibility
for strategic planning is assigned to the operating unit, but the centre does take a
view as to the long-term balance of its constituent businesses. Short-term constraints
may be relaxed if the unit’s longer-run opportunities look good. The centre will also
evaluate the strategies of the businesses and withhold resources if it is unconvinced
by them. Examples of such companies are Nestlé, 3M and L’Oréal. The three types of
company are contrasted in Table 4.2.
None of these approaches demonstrates clear superiority. Largely this is because suc-
cess depends upon many factors. Strategic planning is a highly effective vehicle for
focusing on the creation of sustainable competitive advantage. But financial control
may be superior in stimulating personal effort and accountability. A strong strategi-
cally-oriented centre facilitates long-run growth, whereas financial control pushes
ongoing results. In the short run, the latter will often be less risky and produce supe-
rior profits. The appropriate style will also depend upon the type of industry. In
dynamic, resource-intensive industries such as electronics and pharmaceuticals, a
focus on tight financial controls would quickly kill the business. But in mature
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Table 4.2 Corporate strategy and style

Role of
headquarters in Characteristics Strategic planning Strategic control Financial control
strategic market
HQ strategic Dominant Balance Minimal
planning planning
Organisational Matrix Divisional Holding company
structure
Synergies High Medium Low
among SBUs
Managerial values Collaborative Personal responsibility Personal accountability/
shareholding
Growth mode Primarily internal Mixed Acquisition/flotation
Type of industry Dynamic Mixed Mature
Investment Long term Medium Short term
payback
industries, a priority for generating cash can provide the resources for a long-run
acquisition-led growth strategy.
A corporate strategic plan consists of six main components (Figure 4.3).
Corporate mission
More and more organisations now write mission statements that seek to describe the
purpose of the business and its essential character. A mission statement has four func-
tions. First, it is meant to motivate employees by providing them with an external
goal worth striving for. Second, it can provide a shared sense of purpose to people
working in widely separated business units. It can provide a feeling of belonging to a
family of like-minded people. Third, it gives a sense of direction by identifying those
markets or technologies where management sees the best opportunities. Finally, it
identifies major policies that define how it should treat customers, employees, suppli-
ers, distributors and other key stakeholders.
The components of the mission statement are as follows.
Corporate Corporate Identify

mission objectives SBUs
Resource Explore Corporate

Figure 4.3 allocation synergies development
Components of
corporate strategy
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Corporate strategy
Definition of competitive scope

The scope of the organisation defines what its business is, who its customers are, and
what needs it will seek to meet. Competitive scope can be defined along a number of
dimensions. Industry scope refers to the range of industries in which it will consider
operating. Some companies, such as Carlsberg or GlaxoSmithKline, limit their scope
to one industry; others, such as Tyco or Sweden’s Procordia, will consider any indus-
try where they see profit opportunities. Customer scope refers to the type of
customers it will seek to serve. Dunhill, for example, focuses only on up-scale cus-
tomers. Vertical scope defines the degree to which it will take direct responsibility for
manufacturing its inputs and distributing its final products. Geographical scope refers
to the number of countries or regions it will seek to operate in. Does the company
seek to be a true multinational or to be a geographical niche player?
Strategic intent or vision

Increasingly, businesses see the mission statement as a means of inspiring employees.
Maximising profits or shareholder value is not a great motivator. Profit anyway is
better seen as a result of a successful competitive strategy rather than as an actionable
objective itself. Competitiveness – being the best – does seem to be more capable of
inspiring commitment and enthusiasm if convincingly articulated. Companies such
as GE, Coca-Cola, Microsoft and Toyota have achieved outstanding commitment and
pride among their workers by challenging them to make their organisations the
leader in their fields.
Competences and competitive advantage

The mission statement should also define the organisation’s core values. These are
the special skills it possesses that should allow it to offer superior value to customers.
For example, 3M stresses innovation as its special competence; Toyota focuses on out-
standing quality and value for its mass-market customers; Lexus builds its
competitive advantage around innovation, technical superiority, reliability and
customer satisfaction. Stating these core values encourages employees to prioritise
building competences in these areas.
Key stakeholders
An organisation’s success depends upon the support of various groups. The most
obvious ones are customers, employees and shareholders. But increasingly it depends
on the endeavours, or at least the acceptance, of others including suppliers, the
banks, distributors, the local community, national and supranational regulatory
bodies. The mission statement should identify those groups central to the firm’s long-
term success, identify their requirements and state the priority that it believes should
be attached to them.
Corporate objectives
The company’s mission statement is broad and visionary. In contrast, the company’s
objectives should be specific and quantifiable and cover a defined time frame.
Sometimes objectives are top-down, whereby headquarters defines what it wants and
then tells each of the businesses what they need to contribute to the total goal. In
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others, they are bottom-up, whereby the corporate objectives are simply an aggrega-
tion of what the business units decide they will achieve. More generally, it is an
interactive process that balances the ambitions of the centre with the greater knowl-
edge in the units of what can be accomplished in their markets.
Many western companies make profits the central objective. This is a mistake that in
the long run will erode the company’s competitiveness. Profits are, of course, neces-
sary to satisfy shareholders and to generate the resources to develop the business. But
profits are tautological as a business objective, since they are a result of running the
business efficiently and effectively. They measure the consequences of what managers
have done, not how they have done it. Objectives should focus not on profits them-
selves, but on what generates them.
Marketing and innovation should be the foundation areas in setting objectives. It is
the firm’s performance in these areas that the customer pays for. If the company is
not good at satisfying customers today and tomorrow, it will not make profits. In
other areas – manufacturing, personnel and productivity – objectives and perform-
ance are important only to the extent that they enhance the attainment of the firm’s
ability to satisfy customers and foster innovation.
Management needs to set a balanced array of objectives that cover all those areas
which influence these two key measures of performance.
Six types of objective are needed:
■ Market share objectives. For those markets where the company has chosen to com-
pete, it needs to build a viable position. In many market segments, unless a company
is number one or number two, it will be a marginal and vulnerable supplier.
■ Innovation objectives. Without innovation in its products or services, its marketing
approach, or its means of production, the company will be made obsolete by com-
petitors. It therefore needs clear objectives in these areas: for example, 50 per cent
of sales should be from products or services introduced in the last five years.
■ Resource objectives. Objectives are needed to attract the most valuable assets in
the market: skilled employees, capital and physical facilities. These are marketing
objectives. Companies compete to attract the best graduates. Retailers compete to
gain the best sites. Their success in attracting the most valuable resources signifi-
cantly influences their ability to meet their other goals.
■ Productivity objectives. A range of measures is needed to evaluate the efficiency
with which these resources are employed. Unless people, capital and facilities are
made productive, they will not generate enough value to be retained and renewed.
■ Social objectives. The social responsibilities of business can take two forms: being
concerned about what the organisation does to the community, and being able to
do things for it. The first has been a major trend in the last decade. Communities
are hostile to companies that produce negative environmental impacts.
Organisations must identify these impacts and seek to minimise them. A more
positive approach is making the skills and capabilities of the organisation available
to the community for helping to solve ongoing problems of education, unemploy-
ment and other social issues.
■ Profit objectives. Only after the above five core objectives are set can management
define what profit it needs to achieve. These core objectives determine the capital
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Corporate strategy
needed and the risks involved. Profits are the necessary carrot to attract capital and
to induce shareholders to share the business risks. Profit is therefore best seen as a
constraint rather than an objective. It is the minimum return on capital needed for
the business to survive and grow.
Defining strategic business units

When a company develops beyond a certain size, it needs to divide into separate
business units to facilitate management performance. Each of these strategic business
units (SBUs) then needs a definition of its business that specifies the arena in which it
will compete.
Companies often define their businesses in terms of the products they produce. They
say they are in the ‘railways business’, the ‘agro-chemical business’ or the ‘music
business’. But, as Levitt showed in his classic ‘Marketing myopia’ article, this is a dan-
gerous way to define a business.4 Products are made obsolete by new technologies
and changes in needs. To prevent the company being made obsolete, Levitt proposed
that companies should define themselves in terms of the customer needs they served
rather than the products they sold. So instead of railways the company should define
its business as meeting customers’ needs for transportation; rather than music, a
business should be defined as entertainment.
While Levitt’s criticism of product-defined businesses was undoubtedly correct, his
alternative can often be unrealistically broad. It underestimates the challenges of
acquiring the new technologies to meet the changing needs of customers. For exam-
ple, Levitt’s idea is that to continue to meet the transportation needs of its customers,
the railways should have moved into ‘cars, trucks, airplanes, even telephones’.
A better way of analysing the strategic options is to define the business in terms of
three dimensions:5
■ Customer group dimension. How many market segments will the business seek
to serve?
■ Customer need dimension. How many customer needs will it meet?
■ Technology dimension. What technologies will it seek to master?
As Figure 4.4 shows, a business can compete in several ways. Business A meets a
single customer need across multiple customer groups with a single technology (e.g. a
business manufacturing steel rivets that it sells to the construction, mining, agricul-
ture and aerospace industries). Business B sees its expertise as technology and
industry knowledge, and meets multiple needs for a single technology and a single
customer group (e.g. a business manufacturing steel rivets, riveting guns and other
related tools, specifically for the aerospace industry). Business C serves a single need,
in a single industry, but offers alternative technologies (e.g. plastic and steel rivets for
the construction industry).
By mapping out its activities this way a business can assess the strengths and weak-
nesses of its position. Management can consider whether the core skills of the
business are in technology, understanding specific customer needs, or knowledge of
certain industries. Managers can look at the weaknesses inherent in their business
definition. For example, competing in many customer groups (markets or industries)
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Customer needs
Tools B
Rivets A
Guns
Agriculture Aerospace Construction Mining
Plastic Customer
groups
Steel
C
Composites
Figure 4.4
Defining the Alternative technologies
business
usually gives manufacturing cost advantages, but it fragments the sales and distribu-
tion activities. Meeting multiple customer needs risks uneconomic dispersion of
technological and manufacturing resources. Management can also consider which is
the best growth direction. Is it better to edge out into new technologies, new markets
or new needs?
An SBU must be a sensible managerial entity. That is, it must be capable of being run
as an independent business. Ideally an SBU should meet three criteria:
■ It should serve an external rather than an internal market. If the unit’s output goes
only to an internal customer, it is best treated as a cost centre.
■ It should have distinct customers and competitors. If two SBUs have the same cus-
tomers and competitors, they are best managed together.
■ Management of the SBU must have control over the key factors that determine suc-
cess in the market. If they were forced to share a pooled sales force and
manufacturing activities, such control would be absent.
Resource allocation
A company has a portfolio of SBUs. Some of these SBUs will offer much more attrac-
tive growth and profit opportunities than others. The company therefore must agree
appropriate objectives with each of the SBU managements. Some of the SBUs will be
targeted for build, others for growth, maintain, harvest or divest. Not only will the SBUs
differ in potential, but they will also differ in their cash flow characteristics. Some,
with major new products or pursuing new market opportunities, are likely to require
net cash investment. Others, with strong market shares and in mature markets, are
likely to be substantial generators of cash. Top management has to ensure that cash is
channelled into the appropriate SBUs.
The choice of SBU objectives and decisions about resource allocation depends upon
two factors: the attractiveness of the market and the relative competitive strength of
the SBU. It generally pays to set more ambitious objectives and prioritise resources to
SBUs that are in attractive markets and which have a competitive advantage. Market
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Corporate strategy
attractiveness is a function of such factors as market size, growth, degree of competi-

tion, profit levels, government regulations and sensitivity to economic fluctuations.
The SBU’s relative competitive strength depends upon its market share, product posi-
tioning, cost competitiveness, technical skills, marketing and distribution
capabilities, and organisational flexibility.
Drucker introduced portfolio planning 30 years ago. He found that most companies’
products or markets could be broken into six types:6
■ Tomorrow’s breadwinners. New products that, while not yet profitable, can be
expected to be in the near future.
■ Today’s breadwinners. Well-established businesses that generate the bulk of the
firm’s profit and cash.
■ ‘In-between category’. SBUs with a capacity to generate good results if drastic
turnaround actions are taken.
■ Yesterday’s businesses. SBUs that were once strong but have now been made
obsolete by changes in the market environment.
■ ‘Also-rans’. Products that, while not total disasters, never achieved what was forecast.
■ Failures. SBUs that should have been eliminated long ago.
Drucker showed how companies allow resources and management time to be sucked
into the last three categories, to the long-run detriment of those SBUs that are, or
have the potential of, generating outstanding results. More recently, a number of
rather more sophisticated portfolio planning techniques have become widely used for
helping to set objectives and allocate resources across SBUs.
The BCG growth–share matrix

The Boston Consulting Group’s growth–share matrix, developed in the early 1970s,
probably became the most popular management technique ever. In the 1970s and
1980s it became ubiquitous as a model for analysing the company’s portfolio of SBUs.
The BCG matrix positions the firm’s businesses in two dimensions, as shown in
Figure 4.5.
The vertical dimension is the growth rate of the market, which is used by the BCG as
a proxy variable for market attractiveness. High-growth markets are assumed to be
more attractive because, being competitively non-zero sum, market share gains are
often more easily obtained. Also market share gains in a growth market will be worth
more in the future as the market develops. The mid-point between high and low
market growth is arbitrary, but a 10 per cent annual growth rate is a popular figure.
The horizontal dimension is relative market share (ratio of SBU share to share of
largest competitor), which is used as a proxy for relative competitive strength. This
axis is plotted on a log scale so that the mid-point is 1.0, at which a firm’s market
share is exactly equal to that of its largest competitor. A relative market share of 0.1
means that the SBU’s sales are only 10 per cent of the leader’s; a share of 2 means that
the SBU is the leader and has twice the sales of its nearest follower. High market share
is assumed first to give the SBU a cost advantage. This occurs primarily through the
experience curve, which suggests that firms with the greatest cumulative production
experience obtain lower unit costs through greater learning and the ability to incor-
porate the latest technology and design. Costs may also be lowered by economies of
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Stars Question marks

22%
20%
4 1
18%
Market growth rate 16% 3
14% 2
12% 5
10%
Cash cows + Dogs
8% +
6%
4% 6 7
2% 8
Figure 4.5
10x
4x
2x
1.5x
1x
0.5x
0.4x
0.3x
0.2x
0.1x
The Boston
Consulting Group’s Relative market share
growth–share matrix
scale in buying, production and marketing. A second advantage of a high market

share is that high brand recognition gives greater bargaining power with buyers, lead-
ing to potentially higher margins. Certainly there are many empirical studies that
suggest a correlation between market share and profitability. The most well known of
these – the PIMS study of over 3,000 SBUs in over 450 firms – shows that on average
a difference of 10 per cent in market share is associated with a difference of about 5
per cent in pre-tax ROI.7
Figure 4.5 plots the positions of a company’s SBUs. The size of the circles represents
the relative sales levels of the SBU. The matrix is divided into four cells, each of
which has broad policy implications and cash flow characteristics.
■ Cash cows. The bottom-left quadrant consists of SBUs with high market shares
operating in low-growth markets. Because they have a high market share, prof-
itability should be good (+), and because investment requirements will be low,
given the maturity of the market, cash requirements should be small (+).
Consequently, cash cows should be generating the resources to support the com-
pany’s development in other high-growth markets. These are what Drucker termed
‘today’s breadwinners’.
■ Stars. A star is a market leader in a high-growth market. Profitability should be
good (+), but investments to maintain the SBU’s position are likely to be high (–).
The stars should be the company’s top priority for resourcing. In the future, when
the market matures, they should become the company’s cash cows.
■ Problem children. These are businesses with low market share in high-growth mar-
kets (also called ‘question marks’ or ‘wild cats’). They have high cash requirements
because of their weak positions in resource-hungry markets. The company is often
in a ‘double or quit’ situation. Whether it invests aggressively, seeking to overtake
the leading competitors and become a star, depends upon three considerations.
First, how much can the company afford to invest? Second, has the SBU the
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Corporate strategy
potential to create a real differential advantage capable of switching customers

away from the market leader? Third, how aggressively and effectively could com-
petitors respond to an attack? If a problem child’s position cannot be improved, it
will continue to absorb cash. As the market matures, it will become a cash-absorb-
ing dog – a ‘cash trap’.
■ Dogs. These have low market shares in low-growth markets. Generally they are
unprofitable, and if they require investment to maintain their position, they
become cash users. Dogs often consume more management time than they are
worth and the general recommendation is to divest from these businesses.
Portfolio analysis has three uses. First, a business can assess the balance of its portfo-
lio. In the long term a company needs to maintain a balance between cash use and
cash generation. If too many of its businesses are cash cows, then while it is rich in
cash in the short term, it is vulnerable due to its lack of long-term growth potential.
Such companies often become takeover targets for others anxious to employ their
cash-generating ability. On the other hand, companies with a portfolio dominated by
stars and problem children are likely to find themselves with insufficient resources to
maintain market share. They risk taking on excessive debt, or, if they are more pru-
dent, they are likely to be caught up by better-financed competitors. In such a
situation, a firm may decide to sell off some of its SBUs to generate resources.
Second, the portfolio provides a framework for strategic market planning. Over time
SBUs are expected to change their positions in the matrix. Successful SBUs follow a
life cycle. They generally start as problem children; then, if they are managed success-
fully, they are built into stars; eventually they become cash cows as the market
matures; and finally they become dogs. The matrix provides a snapshot at one point
in time. But management should also plan a moving picture of how the company’s
SBUs will develop over time so that market opportunities and cash-generating poten-
tials are optimised.
Third, each SBU should have a clear objective appropriate to its portfolio position.
Growth will be an appropriate objective for stars and selected problem children.
Maintenance of sales is the likely objective for strong cash cows. Harvest will be the
objective for weakening cash cows, some of the dogs and non-priority problem chil-
dren. Divestment will be set for those dogs and problem children that are seen as
having no potential.
Limitations of the BCG matrix

The BCG matrix became popular because it was easy to use and was intuitively
appealing. Today, however, it has become somewhat discredited as managers have
become more aware of its assumptions and limitations. The major weaknesses are
as follows:
■ Market growth is an inadequate description of overall industry attractiveness.

Factors such as low entry barriers, capital intensity and strong buyers can make
even high-growth markets oversupplied, price oriented and unprofitable.
■ Market share is an inadequate proxy for relative competitive strength. Other fac-
tors such as location, degree of vertical integration and capacity utilisation also
affect relative costs. Price and margins are also influenced by product positioning
and shared marketing, distribution and brand franchises.
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■ The analysis is highly sensitive to how the market is defined. Do market share and
growth refer to the total market or to the segments served? Is BMW’s share 2 per
cent of the total market or 30 per cent of the luxury car segment? Definitions of
the market can be fairly arbitrary and different definitions will radically change an
SBU’s matrix position.
■ The model assumes that business units are independent. If two SBUs share facili-
ties, divesting in the dog might weaken the star. In a highly competitive situation,
harvesting a problem child might well allow the competitor to boost its profits.
The additional cash that the competitor generates may allow it to attack the com-
pany’s own star in another market.
■ The model incorrectly assumes that capital is rationed and has to be allocated
among the SBUs. But there is no such rationing – the capital markets are quite will-
ing to fund all projects that promise to produce returns above the cost of capital.8
Composite portfolio models

In an attempt to overcome the limitations of the BCG model, a number of alterna-
tives have been proposed. The most well known are those of McKinsey, Shell and
Little.9 Although they differ somewhat from each other, all are similar in their thrust
of replacing the two BCG dimensions with more comprehensive indices of market
attractiveness and competitive strength.
The McKinsey approach positions the firm’s SBUs in a 3 × 3 matrix according to their
market attractiveness and the business’s competitive strength. Market attractiveness,
instead of just being based on growth, rates as many factors as appear relevant in the
particular industry. In the example of Figure 4.6, nine factors are used. The managers
involved have to select the most relevant factors, weight them by importance, rate an
SBU on each factor, and then combine the evaluations to a summary measure. The
Industry attractiveness
High Medium Low
Business’s competitive position
High 1 2 4
Medium 3 5 7
Low 6 8 9
Variables that might be used to evaluate:

Business’s competitive position Industry attractiveness
Size Distribution Size Profitability
Growth Technology Growth Technological sophistication
Relative share Marketing skills Competitive intensity Government regulations
Figure 4.6 Customer loyalty Patents Price levels
A composite Margins
portfolio model
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Corporate strategy
second dimension is the business’s competitive position. Again, as illustrated, a range

of factors besides market share are identified and summarised.
The major application of this type of matrix is to help managers match the firm’s
strengths with the market opportunities available. The firm should invest and
attempt to grow in the areas where it is strong and the market is attractive (in Figure
4.6 these are boxes 1, 2 and 3). Shell Chemicals, which uses a similar model that it
calls the ‘directional policy matrix’,10 assigns the following strategy recommendation
to each of the nine cells:
1 Leader. This is the optimal position for an SBU, being in a strong position in a
highly attractive market. The strategy is to give the top priority to enhancing or
maintaining this position.
2 Growth leader. Investment should be made to allow the product to grow with the
market. Generally the product should be profitable and the growth self-supporting.
3 Try harder. This position might be vulnerable over time. Consideration should be
given to investment to strengthen its competitive position.
4 Cash generation. These SBUs should be cash suppliers and should not require
investment.
5 Proceed with care. Caution is required when investing in these businesses, since
neither are they market leaders nor are their markets strikingly attractive.
6 Double or quit. Businesses here should be decisively partitioned into those to be
abandoned and those selected for priority investment.
7 and 8 Phased withdrawal. Profit prospects are slight and the strategy should be a
controlled switch of resources to other uses.
9 Withdrawal. These businesses will be losing money and their assets should be dis-
posed of as quickly as possible.
Conclusions on portfolio models

Portfolio models reflect the fundamental strategic proposition that it makes sense for a
company to invest in attractive markets where it has relative competitive strength.
The idea that managers should have tools to formalise and structure their analyses is
also appealing. The problem is that all such techniques require simplification if they
are to be understood and applied. Not all possible variables and situations can be
included in the models. The weakness of the BCG approach is that, by limiting its
analysis to only two variables, it simplified the problems excessively and so limited its
application to those areas where market share and growth were the overriding factors.
The composite models, by including more variables that are likely to have an impact
on future profitability, are more realistic and more widely applicable. The price to be
paid is more subjectivity in the measures and greater ambiguity in the results.
None of the models gives much insight into implementation. Opportunities in a
market are not given, but depend significantly upon the firm’s creativity in identifying
new segments and building growth opportunities. Similarly, the firm’s competitive
position can be enhanced by innovation and developing new capabilities.
Portfolio models a few years ago achieved exaggerated emphasis in strategic plan-
ning, but today they risk being overly discredited. These models should never have
been thought of as decision-making tools. Rather they are analytical techniques that
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can give managers important insights into the balance of their businesses, their rela-
tive strengths and the opportunities open to them.
Value-based planning models

Portfolio models give broad indications of which SBUs to invest in. However, they do
not permit the evaluation of a proposed strategy for an SBU. Value-based planning is
a resource allocation tool that attempts to measure the shareholder value that any
proposed strategy is likely to create.
The components of the model are shown in Figure 4.7. The shareholder value created
by an SBU strategy depends upon three factors: the cash flow it generates, the busi-
ness’s cost of capital (which is used to discount future cash flows to their present
value), and the market value of the debt assigned to the SBU.11 The core of the model
is the cash flow generated by the strategy. This is determined by six ‘value drivers’:
the rate of sales growth that the strategy is forecast to produce, the operating profit
margin, the income tax rate, working capital investment, the investment in fixed
capital and the duration of the value growth. The last, the duration of value growth,
represents management’s estimate of the number of years over which the strategy can
be expected to produce rates of return that exceed the cost of capital. A strategy is
worth pursuing from a shareholder point of view if it creates additional value, assum-
ing other alternatives available would not generate even more value.
While analytically appealing and increasingly used (especially in acquisition studies),
value-based planning has a number of practical problems. The major difficulty is the
requirement to forecast detailed performance variables 10 or more years ahead. These
include projections of sales volume, product mix, prices, cost, competitive actions
Corporate Creating shareholder Shareholder return

objective value ● Dividends
● Capital gains
Valuation Cash flow from Discount Debt

components operations rate
● Value ● Sales growth ● Working capital ● Cost of

Value growth ● Operating profit investment capital
drivers duration margin ● Fixed capital
● Income tax rate investment
Management
decisions Operating Investment Financing
Figure 4.7
The shareholder
value allocation Source: Reprinted with permission of the Free Press, a division of Macmillan, Inc., from Alfred Rappaport, Creating
Shareholder Value: A new standard for business performance, p. 56. Copyright © 1998 by Alfred Rappaport
model
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Corporate strategy
and investment requirements. In most industries today, such long-term projections

are mere guesses. No one can foresee what competitive conditions, demand, capacity
and technologies will be like 10 or 20 years ahead. The problem is that when such
guesses are fed into the spreadsheet and the value estimates begin to be churned out,
the numbers often begin to take on a life of their own. Managers accept the numbers
as ‘truth’, losing sight of the often hopelessly unreliable assumptions behind them.
In addition, a number of important studies have shown how such financial planning
models undervalue investment in holding on to current customers. An analysis often
assumes that, if an investment is not made in a new product, the SBU will maintain
its status quo. However, what the financial model often does not take into account is
that, without the investment, current performance will deteriorate because customers
will switch to more dynamic competitors that are investing in added-value enhance-
ments to their product lines.
Third, value-based planning only seeks to evaluate alternative strategies. It does not
generate strategies. The best strategy will never emerge from the evaluation process if
management fails to identify it. Truly creative strategies depend upon a detailed
understanding of the changing market environment. Finally, the models assume that
shareholders are the only stakeholders. However, any company aiming at long-term
viability needs to consider balancing the partly conflicting objectives of its multiple
stakeholder groups.
Exploiting synergies
Most resource allocation models treat the SBUs as independent. However, exploiting
interrelationships between the businesses can generate powerful sources of competi-
tive advantage. Synergy means that the whole is more than the sum of the parts. It
means that two SBUs acting together will be superior to the same two SBUs acting
independently. If larger companies fail to exploit synergies then they have no advan-
tage over their smaller competitors. Synergies can benefit the company by
accelerating innovation, increasing sales of current products, decreasing costs or
reducing the levels of investment needed to run the business.
Potential synergies exist throughout the value chain. First, sharing support activities
such as procurement, technology development, human resource management and
overheads can cut costs and enhance the quality of the personnel available. Next,
each of the primary activities offers sources of synergy. Combining buying operations
can produce discounts. Shared operations, outbound logistics and service can build
experience and scale economies. Marketing and sales synergies are particularly impor-
tant. One business unit can create leads for others. For example, American Express’s
credit card business allows its customer database to be used by its other divisions sell-
ing insurance, travel, magazines and other merchandise. Similarly, a brand franchise
can be extended to create or enhance the performance of another unit. For example,
the Mars brand name, originally based around confectionery, was successfully used to
launch a new ice-cream business. Finally, many potential synergies are knowledge
based. The performance of one unit can be improved by the transfer of competences,
knowledge or experience from other units within the firm. For example, the technical
knowledge that Canon developed in the camera business was a crucial factor in its
successful entry into the office copier business. The German subsidiary of Microsoft
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owed much of its success to following the marketing strategies proved earlier in the
US division.
Synergies can be identified and exploited in various ways. Many companies group
related SBUs into separate divisions that facilitate the sharing of primary and support
activities. Others centralise or regionalise certain activities to enhance knowledge-
based synergies. For example, a corporate R & D department is often better at
discovering new technologies with potential applications across multiple businesses
than if each unit bore the burden of funding its own R & D efforts. Many companies
have strong corporate-level co-ordinators to maximise the strength of the firm’s accu-
mulated marketing and technological knowledge when competing in global markets.
Company-wide management education and taskforces also build networks and share
knowledge to lever the performance of individual businesses. An example of how
Toshiba exploits synergies is shown in Box 4.2.
It is important that the SBU managers buy into the search to exploit synergies. If
head office dictates pooling and sharing schemes, the search for synergies can evapo-
rate and turn into barriers to progress. Sharing facilities can introduce bureaucracy,
limit the autonomy of managers and reduce a business’s ability to respond quickly to
changing market conditions. If the unit’s management cannot control its own opera-
tions and sales, then it cannot be accountable for profit performance and can easily
lose the incentive to be entrepreneurial and customer driven.
Corporate development
When the company aggregates the plans of its individual businesses, it will have a
projection of corporate performance in terms of marketing, innovation and financial
measures. Often there will be a gap between this projected performance and that
desired by top management (Figure 4.8). In this case there will be two alternatives: to
reduce the objectives, or to seek to boost projected performance by reviewing the
opportunities open to the businesses. The projected performance of the firm can be
increased either by getting more from its current businesses, or by diversifying into
new ones.12
Box 4.2 Toshiba: exploiting internal and external synergies

Toshiba sees its future in moving from producing electronic components and equipment (video, computers,
semiconductors) to multimedia. It foresees an integration of electronic products with media services and
software (newspapers, TV, movies, etc.) to create entirely new markets and businesses.
To exploit this opportunity, Toshiba assigns top priority to eliminating barriers between its operating divisions
and specialist business units. It has also set up a range of international strategic alliances with leaders in
adjacent hardware and software. These include IBM, Siemens, Sony and AOL-Time Warner. To catalyse this
process Toshiba set up the Advanced-I Group reporting directly to the president. The group has three
objectives: first, to promote synergies between Toshiba’s businesses to create new infrastructures, products
and services; second, to concentrate development of key components and technologies; and, third, to
create external synergies by promoting strategic alliances that spread the development burden, encourage
innovation and share ideas.
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Corporate strategy
Performance
Objective
Acquisitions
Internal
growth
Projected
results
Figure 4.8 5 10 Year

The strategic s
planning gap
Internal growth
Management should first assess whether higher performance can be achieved by the
existing businesses. The first step is to review operating efficiency. The business units
can be asked to look for specific levels of cost savings and economies. Second, oppor-
tunities to enhance marketing and innovation performance can be reappraised. This
means systematically reviewing opportunities in the following areas:
■ Market penetration – increasing market shares of current products in current markets.
■ Market development – looking for new markets for current products.
■ Product development – developing new products for existing markets.
■ Integration – including backward integration to take over supply functions previously

bought in; forward integration or taking over sales activities previously done by third
parties; or horizontal integration, meaning acquiring competitive businesses.
External growth
If internal growth is insufficient to close the strategic planning gap, corporate manage-
ment may turn to opportunities for diversification to boost performance. Success at
diversification depends upon finding new markets that are attractive and where the
firm has the capability to build a sustainable competitive advantage. The task of man-
agement is then to draw up a list of candidate industries that may meet these criteria.
Industry structure analysis provides the means for evaluating whether an industry is
potentially profitable for the firm. The best-known model is that of Michael Porter,
which shows that the profitability of the average firm in an industry depends upon
five factors (Figure 4.9):13
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Potential
entrants
Threat of
new entrants
Bargaining Bargaining
Industry
power power
competitors
of suppliers of buyers
Suppliers Buyers
Rivalry among
existing firms
Threat of substitute
products or services
Substitutes
Figure 4.9
The five-factor Source: Reprinted with the permission of the Free Press, a division of Macmillan, Inc., from Michael E. Porter,
Competitive Strategy: Techniques for analyzing industries and competitors, by p. 4. Copyright © 1980 by The Free
model of industry
Press
profitability
■ Competition among existing firms. Industry profitability will be low if there is

intense competition between the competitors in the industry. Competitive inten-
sity tends to be high where there are a large number of competitors, if the market
is stable or declining, if fixed costs are high, and where competing products are
perceived as very similar.
■ Threat of new entrants. Profits will be depressed if it is easy for new competitors to
enter the industry. Barriers to entry that can keep profits high include high capital
investment, patents, economies of scale, restricted distribution channels and
brand loyalty.
■ Threat of substitute products. An industry’s attractiveness is less if the product is
easily substituted by alternative technology or the products of other industries.
■ Strength of buyers. If buyers are strong, they will have the bargaining power to
squeeze the profits of producers. For example, the increasing strength of the major
retail buying groups has been a major factor depressing the profits of grocery
goods manufacturers.
■ Strength of suppliers. If raw material suppliers, utilities or trade unions are strong,
they can depress the profits to be earned in the industry.
The Porter model shows what determines the average profits in an industry. The com-
pany’s ability to obtain profits above this average level depends upon its building a
sustainable competitive advantage. This in turn depends upon the relative capabili-
ties of the business. These capabilities are likely to be strongest where the firm
diversifies into industries where there are some marketing or technological synergies
with current businesses.
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Business unit strategy
After an industry is selected, the company has to decide how to enter: should it
develop a new business, should it acquire, or should it look for partners to develop
alongside? The advantages of an acquisition are that it is fast and it removes a poten-
tial competitor. The disadvantages of acquisition are first that the bid premium often
makes the route expensive. Second, it is unlikely that any acquisition will match the
company’s capabilities and facilitate synergies as effectively as a business developed
internally. Partnerships and joint ventures can take many forms including licensing,
franchising, joint sales companies and shared research and development. These pro-
vide an increasingly attractive route, offering the potential of a faster path into new
markets than internal development and a less risky option than acquisition.
In the hierarchy of plans, the business unit strategy sits in between the high-level cor-
porate plan and the detailed plans for individual products and markets. A business
unit is responsible for a collection of closely related products or markets. While a cor-
porate plan sets the broad direction for the company, the business plan details how a
sustainable competitive advantage will be achieved, allowing the SBU to contribute
to the corporate objectives. The key components in the business plan are shown in
Figure 4.10.
Business mission
In highly diversified companies, the corporate mission statement may have to be
very broad. Such missions are often viewed as meaningless ‘motherhood’ statements,
devoid of content and motivation. As a result, many business unit managements find
it desirable to develop their own mission, describing more specifically the unique
scope of the business, its vision, specific competences and competitive advantages.
Business Strategic Competitive

mission focus advantage
Strategic Customer Marketing

objectives targets mix
Resource Competitor Implementation

Figure 4.10 allocation targets and control
Components of
business strategy
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Like the corporate mission statement, the functions are intended to encourage a feel-
ing of pride in the business, a shared sense of purpose, to give it direction and to
emphasise the major policies that should be pursued.
Strategic objectives
The broad strategic objectives of the business unit will have been determined as part
of the corporate planning process. In reviewing its portfolio of SBUs, the centre will
have assigned resource priorities to each of them. The broad strategic choices are:
growth, maintain, harvest, divest and, for a new business, enter.
These broad strategic choices will then be translated into detailed marketing, innova-
tion, resource, productivity, social and financial targets for the business over the
planning period.
Resource allocation
An SBU will have its own collection of products and markets. Some of these will rep-
resent much better investment opportunities than others. Management will therefore
have to decide which products and markets to prioritise. This is a micro-version of
the corporate resource allocation process. Often SBU management finds the same
portfolio planning tools useful for assessing choices. Management will determine the
attractiveness of individual target market segments and the relative strengths of the
company’s products within these areas.
The main point is that while corporate management may have assigned, say, a ‘main-
tenance’ objective for the SBU as a whole – implying limited growth and investment
aspirations – within the SBU a variety of separate goals will be being pursued. Some
product-markets will be geared for entry, others for growth, and others for harvesting
or disinvestment. Management of the SBU needs to exploit to the full the resources
made available.
Strategic focus
Each of the major product lines within the SBU must then be strategically focused.
There are two alternative ways of improving a product’s profitability – a focus on
increasing volume or a focus on improving productivity (more profit from the same
volume). As Figure 4.11 shows, volume can be increased itself in two ways: expand-
ing the market or greater market penetration. Productivity can be improved by
cutting costs, increasing prices or improving the sales mix (e.g. eliminating low-
profit activities).
It is useful to consider these as alternatives because they do conflict. A focus on
volume requires cash and investment; a focus on productivity should generate cash.
Similarly, focusing on volume requires quite different marketing strategies (e.g.
aggressive pricing, investment in distribution, range extension) from one geared to
productivity. The choice of strategic focus depends primarily upon the strategic
objective assigned to the product. If management sees it as being of high growth
potential, the focus is likely to be on volume; if managers see its future as limited, the
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Long-term
profitability
Increase Improve
volume productivity
Expand Market Cost Increase Rationalise

market penetration reduction prices product mix
Stimulate Win
Enter new Variable
primary competitors’ Fixed costs
segments costs
demand customers
Figure 4.11
The strategic focus
focus will be on productivity. Over time, a product is likely to evolve from volume to
productivity: to move from being a cash user to a cash generator. As a product moves
towards lower growth expectations, the task of management is to find new products
and new markets to maintain momentum.
Customer targets
Choosing the right customers and responding to their needs effectively is the central
thrust of strategy. In targeting customers, management needs information to answer
the following questions.
■ Who is the customer and who should it be? This is never an easy question to answer.
Most businesses have at least two sets of customers. Branded consumer goods com-
panies such as Unilever and L’Oréal have both shoppers and supermarkets as
customers. It is necessary to motivate both if the brands are to sell. Similarly, banks
have both borrowers and lenders as customers (with the same customers often
using both products). The privatised UK telephone, gas and electricity utilities
have to satisfy both subscribers and regulatory agencies. Each customer can have
quite different concepts of value, want different things and behave quite differ-
ently, creating real conflicts for the organisation. The selling requirements too may
be quite different. Selling branded consumer goods to households requires classic
consumer marketing skills. But selling these goods to supermarkets requires skills
more akin to industrial marketing.
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■ What customer segments should be targeted? Market segmentation is central to a suc-

cessful strategy. Markets are not homogeneous, but are made up of different groups
of customers, each with their own needs and price expectations. It will invariably
be more profitable to develop separate offerings for each of the main segments of
the market.
■ Who makes the buying decision? Most products and services – both consumer and
industrial – are influenced by complex multiperson decision-making units.
Different individuals in the buying organisation or the household may be respon-
sible for initiating the purchasing process, influencing the choice of supplier,
making the decision and using the product (i.e. the consumer). One of the main
reasons for IBM’s initial success was its early understanding that different people in
a company have to be sold to if the contract is to be won. The people who use the
computer (usually accounting and financial staff) have to buy it. But top manage-
ment also has to be convinced. And so do people who have to use the product as
their information tool: that is, operating managers. A similar situation occurs in
most fields. The marketer has to learn what each individual looks for, what they
value most and how they can be reached.
■ What do they buy? Customers buy products or services not for their own sakes, but
for the benefits they provide or the solutions they offer. Management has to get
beyond a product focus to a fundamental understanding of the needs and prob-
lems faced by customers. It can then look to supply additional products or services
that enhance customer satisfaction and add value.
■ Where do they buy? Carrefour became the biggest retailer in France by spotting the
car-owning shopper’s desire to avoid the hassle of high street congestion. First
Direct developed an innovative telephone banking service in the UK by recognis-
ing that customers did not want to spend time visiting bank branches, yet wanted
up-to-the-minute information about their finances and quick transactions.
■ When do they buy? Many products and services are highly seasonal, so that planning
has to be geared to a buying cycle. The number of household purchases of whisky in
the UK is about one or two per year, with a high likelihood of a purchase at
Christmas. It is estimated that as much as 80 per cent of this annual ‘take-home’
volume occurs during the week before Christmas and up to New Year’s Eve.
Competitor targets
The company does not merely have to be good at meeting the needs of customers,
it has to be better than competitors. Just as customers need to be analysed and
understood, so do competitors. Competitive analysis has taken on greater impor-
tance in the planning activities of many companies. One reason is the slower
economic growth rates that have characterised many industries over recent years.
As a result, more markets are zero-sum: a company can grow only by beating
others. Second, in the last decade, more governments have been deregulating
industries to provide fiercer competition for existing incumbents. Finally, the
European Union has been successful in progressively eliminating barriers to trade
between countries, bringing in a new era of competition in which only the
strongest European competitors will survive.
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Competitive analysis centres around five questions: who are the competitors,
what are their objectives, what are their strengths and weaknesses, what should
the strategy be towards them, and, finally, what should be done to respond to com-
petitor strategies?
Who are the competitors?

There is no easy or permanent answer to this question. Figure 4.12 defines four cate-
gories of competitors. Direct competitors are those offering similar products and
services to the same customers. Two steel companies selling to the construction
market are direct competitors. Product competitors sell the same product to two differ-
ent customer groups. A steel business focusing on the car industry would not be
directly competitive with one selling to the construction industry. Indirect competi-
tors sell different products to the same industry. For example, the construction
industry might use either steel or concrete in its projects. Steel and concrete are dif-
ferent products, but they may be strongly competitive. Finally, implicit competitors are
a much broader set of competitors. A family might see a new car, a holiday or a major
home improvement as alternatives for their limited budget.
A set of direct competitors is often called a strategic group. Porter observes how com-
petitors in most industries fall into a small number of strategic groups.14 Competitors
within a strategic group focus on the same target market segments and pursue similar
competitor strategies. Figure 4.13 illustrates the three major strategic groups within
the UK food retailing sector. The biggest group is the premium sector of supermarket
majors, with national coverage emphasising image, shopping environment and dif-
ferentiated products. Close behind are the members of the value group, offering
national coverage and emphasising good service with lower prices. At the other end
are the low-cost retailers that compete solely on price. In between are local and
regional firms that survive when they can meet specialised local requirements.
Products
Similar Different
Direct Indirect
Similar
competitors competitors
Customers
Product Implicit
Different competitors competitors
Figure 4.12
Types of competitor
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Figure 4.13 Strategic groups in UK retailing
Premium group
Price
● Marks & Spencer
● Sainsbury
● Waitrose
● Tesco
● Asda
● Morrisons
● Co-op
● Local groups Value group
● Aldi
● Kwiksave
Focused groups
● Pricefighter
● Netto
Low-cost group
Range
Branded consumer products companies like Nestlé not only have the supermarkets as
their customers, they are also competitors – the Tesco own label instant coffee brand
is the second largest in the UK after Nescafé.
Research by Harvard’s Michael Porter and the McKinsey Group15 suggests that this
picture can be generalised. They argue that competitors in a market can be cate-
gorised into three strategic groups based on the generic strategies they pursue:
■ Cost leadership. Firms in this strategic group seek to minimise production and distri-
bution costs so that they can win market share by pricing lower than competitors.
Examples of companies pursuing such a strategy are Wal-Mart, Ryanair and Ikea.
■ Differentiation. Firms in this strategic group seek to achieve high performance by
producing products and services that offer superior value to target customers in
terms of such dimensions as superior performance, features, design and brand
image. Examples are Sony, Siemens, McKinsey and American Express.
■ Focus. Firms in this strategic group specialise in a segment or region rather than in
the total market. By obtaining superior knowledge, they pursue a cost leadership
or differentiation strategy targeted to these particular customers. Examples of such
companies are Apple, London Taxis International and Castrol Lubricants.
A company’s ability to shift from one strategic group to another is limited by mobility
barriers. These are entry barriers such as brand images, low-cost production, location
advantages and customer loyalty. Consequently, a differentiated competitor may lack
the cost structure to compete effectively in a low-cost strategic group. Similarly, a
low-cost competitor is likely to lack the image and marketing skills to move easily
into the differentiated group.
Most competitor analysis focuses on direct competitors or those within the same strate-
gic group. This reduces the number of competitors to be analysed to a manageable size.
However, managers should be aware that indirect competitors with substitute products
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or services can be a major threat, the rise of the low-cost airlines at the expense of
national flag carriers is a good example of this phenomenon. Also competitors may
develop over time the skills to shift into new, more attractive strategic groups. For
example, Mercedes-Benz did not see Toyota as a direct competitor in its strategic group.
But in 1990, Toyota launched the Lexus, aimed directly at Mercedes customers. A weak
competitor in the strategic group can also be transformed if it is acquired by a strong
outside competitor. Management has to avoid ‘competitive myopia’. Managers have to
ask not only who today’s competitors are, but who they may be tomorrow.
What are their objectives?

The next step is to interpret each competitor’s objectives and to begin to assess the
threat it represents. Does it have ambitious objectives to expand its market share
aggressively? Two important factors shaping a competitor’s objectives will be the
composition of its portfolio of businesses and its current financial health. If this
product is seen as a star in its portfolio, then the competitor is likely to be aggressive.
On the other hand, if it has other, more attractive opportunities open, its top man-
agement may not wish to make major investments. The second factor shaping the
threat that a competitor represents is its financial performance. If profitability and
cash flow are weak, management are likely to be under greater pressure to restore
profits and curtail expenditures than to seek market growth. Trade research and a
close analysis of the company’s financial statements are likely to provide enough
information for making these assessments.
What are their strengths and weaknesses?

Does a competitor have the capabilities to be a significant threat? To answer this question,
management needs to evaluate the strengths and weaknesses of each competitor against
the company’s own profile. First, the dimensions should cover marketing strengths,
including image among customers, market share, reputation for quality and service, effec-
tiveness of communications, distribution and geographical cover. Second, financial
strengths need to be evaluated, including profitability, cash flow and the amount of debt
carried. Third, strength in operations should be measured, including costs, capacity, tech-
nical skills and on-time delivery. Finally, overall organisational capabilities are important,
including corporate leadership, motivation of employees, flexibility and entrepreneurial
skills. It is useful to get an independent view of these comparative ratings. For the market-
ing criteria it is crucial to establish how customers view the relative performance of
competitors. Managers generally overestimate the reputations of their own products and
people among customers, and underestimate those of key competitors.
What are the likely strategies?

An understanding of their objectives and relative strengths will suggest what strategies
they are likely to pursue. A strategy that has been generating successful results to date is
likely to be continued and developed. If a company has fully exploited opportunities in
its current market segments, it is likely to shift its attention to new market segments or
new geographical areas. Niche players in high value-added segments are particularly
vulnerable to successful mass-market competitors seeking further growth and profit
opportunities. Their access to substantial resources and scale economies can overcome
in time the mobility barriers protecting smaller competitors. Finally, a company is
likely to attack where it has relative strengths. A low-cost competitor is likely to attack a
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high-cost niche player, using price as a competitive advantage. An innovative company

is likely to use differentiation as its weapon.
What should be done?

Finally, the company should consider how to respond to current or anticipated com-
petitor strategies. Ideally the competitive analysis should allow the firm to develop a
proactive approach to competition, but sometimes unanticipated moves require
quick reaction.
A proactive competitive strategy consists of several components. First, and most impor-
tant, it is crucial to seek to deal with those weaknesses that the SWOT analysis has
shown put the company at a serious competitive disadvantage. At the same time, the
company should seek to build up and promote those areas where it has competitive
strengths. Such policies enhance the company’s competitive position in its strategic
group. Second, it should explore opportunities to boost mobility barriers that deter new
competitors from entering the market. These might include maintaining high advertis-
ing levels to consolidate its image, broadening its product range to fill any gaps, seeking
patent protection, controlling raw material sources or building scale economies. Third,
the company can use market signals to influence or control competition.
Market signals can be either defensive or aggressive in intent. Defensive signals might
include publicly explaining its moves and goals to assuage competitors. Aggressive
signals are used as threats to deter competition from attacking. A market leader might
introduce a low-price fighter brand to threaten competitors entering its area. A multi-
national may respond to probes in its home market by a direct attack on its
competitor’s domestic market.
In attacking competition it is crucial to attack in areas where the company is at a
comparative advantage. It is surprising how often companies fail to anticipate com-
petitive reaction. For example, two new British airlines were started to attack the
lucrative cross-Atlantic market: Laker and Virgin. Laker began by publicly signalling
very ambitious market share objectives with low prices as its competitive advantage.
Laker was small and very highly geared, and had virtually all its revenues coming
from the one Atlantic route. By contrast, its rivals British Airways, PanAm, TWA and
American Airlines were, at that time, giants with multiple profitable routes, which
could easily afford to cross-subsidise temporary losses on the Atlantic route.
Concerned about Laker’s ambitions, they cut prices and took business away from the
airline, which quickly dropped below break-even into bankruptcy.
In contrast, Richard Branson’s Virgin Atlantic publicly signalled very small market
share objectives and focused on quality rather than price to win a position. The result
has been that competitors have allowed Virgin to gain share profitably. Virgin
attacked on quality where it was relatively strong and successfully discouraged retalia-
tion by astute market signalling.
Implementing the competitive intelligence system

Many of the largest companies have a section, usually within the marketing depart-
ment, responsible for obtaining competitive intelligence. Other companies may
assign small teams to monitor and become specialists on specific competitors. Their
task is to collect data on a continuous basis from the field (customers, distributors,
sales force, trade associations, etc.), published data (annual reports, press articles, etc.)
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and personal observation. They have to evaluate and analyse the information and
then disseminate it throughout the company. Competitor evaluations should then
feed directly into the strategic planning system.
Core strategy
A business’s core strategy defines how it will seek to gain a sustainable competitive
advantage. The three generic strategies – low cost, differentiation and focus – are useful
to describe how strategic groups compete against each other for customers. But they do
not help in answering the key question of how one firm can gain a competitive advan-
tage against others within its strategic group – against its most direct competitors.
A core strategy is invariably based upon a combination of characteristics borrowed
from all three generic strategies. Being the overall price leader with a poor product
and inadequate service does not offer competitive value to customers. A competitive
advantage for a business in the low-cost strategic group requires being competitive on
price, but it also requires offering on-top features that differentiate from and add
value above those offered by competitors. It will also normally involve elements of
focus, in that offers will be adapted to the differing requirements of major customers
or customer groups.
Similarly, firms pursuing a differentiated strategy operate within price constraints. A dif-
ferentiator can create added values by offering customers not only high-quality
products, but also lower prices or better terms than the competitors within its strategic
group. A major factor in Toyota’s success with its Lexus model was that not only did it
offer a car comparable to the best of its rivals, but it was perceived as being better value.
To summarise, a firm’s core strategy within its strategic group is based on a combina-
tion of five sets of attributes:
■ Price value (based upon low costs achieved by scale economies, experience, vertical
integration, etc.).
■ Product differentiation (e.g. performance, design, features, reliability).
■ Service differentiation (e.g. finance, delivery, after-sales support).
■ Personnel differentiation (e.g. courtesy, reliability, responsiveness).
■ Image differentiation (e.g. confidence in the brand).
To design a specific combination of attributes that will create a competitive advan-

tage requires market research covering the following five steps:
1 Identify the attributes most valued by customers in the target segment. This means lis-
tening to customers about what are, or might be, the key requirements.
2 Rank the attributes in order of importance. Customers should be asked to say what is
most important: price, design, speed of delivery, etc.
3 Score the business and its major competitors along these attributes. Again these ratings
have to be done by the customers in the target segment.
4 Evaluation and strategy formulation. After comparing the business attribute-by-
attribute against its key competitors, the direction of the core strategy should be
clear. If the business is fortunate enough to be superior across all the attributes, it
is in a strong position. Price should not be a problem and a company has the
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choice of either raising prices to increase margins or maintaining price to increase

market share. Most companies, however, will have a mixed picture of competitive
strengths and weaknesses. The analysis will suggest where the business needs to
reposition – which parts of the offer need to be improved, and how price may have
to be realigned to enhance value.
5 Monitoring competitive performance over time. This exercise needs to be done on a
regular basis, probably annually. The picture can shift over time as a result of
changes in customer requirements, new technology and the changing structure
of competition.
Implementation
After the business has developed its principal strategies for achieving its goals, it must
work out how these are to be implemented. Implementation covers activities in four
main areas.
First, the business has to co-ordinate marketing mixes for its major product lines.
These decisions are normally made by the individual product or market managers,
but top management will want to ensure that these are consistent with the objectives
of the business and build the desired types of customer relationship.
Second, the business will want to produce action plans detailing what needs to be
done over the coming year to implement the plan. These will assign responsibilities
for conducting specific tasks to enhance and communicate the business’s core strat-
egy. They may cover programmes to reduce costs, to remodel certain lines, to train
service personnel and to explore new geographical markets.
Third, the business will want feedback and control systems. These will include budg-
ets that enumerate financial targets and which add benchmarks for monitoring
developments and ensuring that the business is kept on track over the next year. The
speed of environmental change is such that few plans will turn out as expected. Both
new problems and new opportunities occur, and management needs systems that
will quickly identify those forces blowing the business onto a new course.
Finally, the business needs periodically to review its organisation. Strategy and sys-
tems are only two of the many factors that go into determining whether a business
will be successful. ‘Organisation’ means much more than the formal structure that
appears on the company’s organisation chart. McKinsey identified seven characteris-
tics that characterise the more successful companies. The first three – strategy,
structure and systems – it defines as the ‘hardware’ of success. The other four, which
are often more vital, it calls the ‘software’ of success (Figure 4.14).
The first of these is style, which refers to the dominant pattern of behaviour and
thinking of the management team. Thus top management at Toyota goes out of its
way to demonstrate to employees a detailed concern with the quality and value of
the company’s vehicles. The second element is skills, which means the specific capa-
bilities possessed by employees that set the company apart from competition. Staff
refers to the dominant culture of the people who work in the organisation. For exam-
ple, Blackstone has a predominantly ‘financial culture’; at Unilever a marketing focus
predominates. The final characteristic is shared values, which means the common
values or goals that motivate people in the business. McKinsey believes that success-
ful companies exhibit strongly held shared values that fit their strategy.
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Summary
Structure
Strategy Systems
Shared
values
Skills Style
Staff
Figure 4.14
McKinsey seven-S Source: T. J. Peters and R. H. Waterman, In Search of Excellence, Harper & Row 1982. Copyright © Peters and
Waterman
framework
Summary
The most important reason for strategic market planning is to force managers to ask the
right questions. General Eisenhower is said to have remarked: ‘Plans are nothing,
planning is everything.’ This assertion is certainly true of marketing. Outcomes will rarely
turn out as planned. The real value of planning is not to forecast events, but to encourage
managers to explore carefully the real determinants of future success in competitive
markets and to assess the business risks. As one executive at the space agency NASA
put it: ‘It’s the risks that you don’t consider that get you.’
Companies that do not undertake strategic market planning are usually fixated by production
or financial priorities. Short-term problems displace the long-term strategic thinking necessary
to build the capabilities required for maintaining and enhancing competitiveness.
Strategic market planning can also stimulate the ambitions of management. Looking to
the future, marking out what looks to be required for being a winner and creating high
aspirations almost invariably enhances performance. Companies that aim high usually
achieve more. Well-thought-out and clearly communicated strategic plans provide a sense
of direction and common endeavour to those working in the organisation.
Drucker once wrote that planning is not necessary for success. In fact, he observed,
success can be achieved by three different means: luck; having a genius run the
business; and planning. The significance of planning is that it is the only route available to
any company which will clearly increase the odds of success. Fortune and genius are
attributes that are not, unfortunately, readily available to management.
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Questions
1 Give an example of a company or an industry which has been subject to sudden

environmental change. Identify what factors have hindered its speed of response to
these changes.
2 Find an example of a company which has shown an ability to respond rapidly to
environmental shocks or strategic windows. What explains this flexibility?
3 Discuss the relative advantages and disadvantages of the Boston portfolio matrix.
4 What are the components of a corporate strategic marketing plan?
5 What should be included in a review of a business’s key competitors?
6 A large consumer goods company has one business unit focused on marketing Scotch
whisky. Outline and comment on the components of a strategic marketing plan which
would be suitable for such a business unit.
Notes
1. This section is adapted from Derek F. Abell, Defining the Business: The starting point of
strategic planning (Englewood Cliffs, NJ: Prentice Hall, 1980). See also Bill Gates, Business at
the Speed of Thought: Succeeding in the digital economy (London: Penguin, 2000).
2. From Igor Ansoff and Edward McDonnell, Implanting Strategic Management (Englewood
Cliffs, NJ: Prentice Hall, 1990). Also see R. Madan C. Sorensen and S.V. Scott, ‘Strategy died
for us around April last year: CIO perceptions of strategy formation process in financial
services’, in Proceedings of the European Conference on Information Systems, Naples, Italy, 18–21
June 2003.
3. Michael Goold, Andrew Campbell and Marcus Alexander, Corporate-Level Strategy: Creating
value in the multibusiness company (New York: Wiley, 1994).
4. Theodore Levitt, ‘Marketing myopia’, Harvard Business Review, July–August 1960, pp. 45–56.
5. Abell, op. cit.
6. Peter F. Drucker, Managing for Results (London: Heinemann, 1964).
7. Robert D. Buzzell and Bradley T. Gale, The PIMS Principles: Linking strategy to performance
(New York: Free Press, 1987).
8. For a discussion of the origins and problems of the BCG matrix see A. Morrison and
R. Wensley, ‘Boxing up or boxed in? A short history of the Boston Consulting Group
share/growth matrix’, Journal of Marketing Management, 7 (1991), pp. 105–29. An excellent
paper describing results of applying the BCG matrix approach can be found in J. Scott
Armstrong and Roderick J. Brodie, ‘Effects of portfolio planning methods on decision
making: experimental results’, International Journal of Research in Marketing, 11 (1994),
pp. 73–84.
9. These are described in detail in many texts, including Roger A. Kerin, Vijay Mahajan and
P. Rajan Varadarajan, Contemporary Perspectives on Strategic Marketing Planning (New York:
Free Press, 1995).
10. D. E. Hussey, ‘Portfolio analysis: practical experience with the directional policy matrix’,
Long Range Planning, August 1978, pp. 78–89.
11. Based on Alfred Rappaport, Creating Shareholder Value: A new standard for business performance,
2nd edn (New York: Free Press, 1998). See also Peter Doyle, Value-based Marketing: Marketing
strategies for corporate growth and shareholder value (Chichester: Wiley, 2000).
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Notes
12. This classic approach to corporate strategy is described in H. Igor Ansoff, Corporate Strategy
(Harmondsworth: Penguin, 1968).
13. Michael E. Porter, Competitive Strategy: Techniques for analyzing industries and competitors
(New York: Free Press, 1980), pp. 126–56.
14. Porter, op. cit., pp. 34–46.
15. Donald C. Waite, ‘Deregulation and the banking industry’, Bankers Magazine, January 1982,
pp. 76–85.
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9736 MMST_C05.QXD 12/5/05 2:49 PM Page 131
‘Marketing is merely a civilized
form of warfare in which most battles

are won with words, ideas and
disciplined thinking.’
Albert Emery
Chapter 5 MARKET DYNAMICS

AND COMPETITIVE STRATEGY
This chapter explores two related issues essential to developing marketing strategies.
First, it examines how markets evolve over time – how they start, grow, reach maturity
and eventually decline. This involves reviewing the limitations of the popular product life
cycle concept and showing the comparative advantage of examining the broader underly-
ing market dynamics which shape the behaviour of both customers and competitors.
While there is no standard product or market ‘life cycle’, there are common evolutionary
processes that influence markets over time.
Second, the chapter describes how an understanding of this process of change in a
market should influence marketing strategy. By anticipating developments in buyer
behaviour, competitive activities and emerging technologies, managers can reposition
their businesses and proactively change products and marketing policies to strengthen
their competitiveness and improve their financial performance. Finally, the chapter
explores the strategic issues facing businesses in different competitive positions. It looks
at the forces that should determine the different marketing strategies of the pioneers of
the industry, those seeking to challenge the market leader, and those companies aiming
at niche positions within the larger market.
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Chapter 5 Market dynamics and competitive strategy
Cycles of confusion
The concept of a product life cycle has had a major impact on the marketing litera-
ture. Every textbook has a chapter on the subject and numerous articles have
appeared on it. It has also influenced many of the popular management techniques,
such as the Boston Consulting Group matrix and the McKinsey portfolio.
Figure 5.1 shows the popular representation of the theory.1 The theory postulates that a
product has a life cycle (usually described by an S-shaped sales curve) which can be
divided into four stages: introduction, growth, maturity and decline. The slow intro-
ductory phase reflects the difficulty of overcoming buyer inertia and stimulating trial of
a new product. Rapid growth then occurs as many new buyers are attracted once the
product is perceived as successful. Saturation of the product’s potential buyers is even-
tually reached, causing the rapid growth to level out to the underlying rate of growth of
the relevant target market. Finally, decline will set in as new substitute products appear.
From this product life cycle theory it has then been common to draw implications for
marketing strategy, the marketing mix and the organisation of marketing.2 The main
recommendations are summarised in Table 5.1. It is argued that in the introduction
stage the strategic objective should be to develop the market aggressively, focusing on
the most innovative customers and seeking to pre-empt competition. As the product
moves into the growth stage, new competitors enter, the initial product has to be
enhanced with features and line extensions, prices have to be cut and distribution
intensified now that a mass market is emerging. As the market for the product matures,
profit margins fall, competition is intense and the organisation has to shift from a
focus on marketing to one on efficiency and cost control. Finally, in the decline stage,
the future is bleak and the business should seek to milk the product for cash. This cash
is then pushed into new products and the product life cycle is repeated.
Sales
Sales and profits
Profit
Figure 5.1 Introduction Growth Maturity Decline

The product life Time
cycle
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Cycles of confusion
Table 5.1
Introduction Growth Maturity Decline
Product life cycle:
implications for Characteristics
marketing Sales Low Fast growth Slow growth Decline
Profit Negative Rapid rise Falling margins Declining
Cash flow Negative Moderate High Moderate
Strategy
Objective Aggressive entry Maximise share Boost profits Milk product
Focus Non-users New segments Defend share Cut costs
Customer Innovators Early adopters Majority Laggards
targets
Competitor Few, pre-empt Growing number Many Declining
targets
Differential Product Brand image Price and service Price
advantage performance
Marketing mix
Product Basic Extensions and Differentiation, Rationalise
enhancements variety range
Price High Lower Low Stabilising
Promotion High High Falling Low
Advertising Awareness Brand Loyalty Selective
forms performance
Distribution Selective Intensive Intensive Rationalise
Organisation
Structure Team Market focus Functional Lean
Focus Innovation Marketing Efficiency Cost reduction
Culture Freewheeling Marketing led Professional Pressured
Despite the popularity of the product life cycle, there is unfortunately no evidence
that most products follow such a four-stage cycle! Nor is there any evidence that the
turning points of the different stages are in any way predictable. On the contrary, the
shape of the sales curves appear to be completely idiosyncratic. One review of life
cycles identified 16 different patterns in addition to the S-curve. Some of the more
common curves found in empirical studies are illustrated in Figure 5.2. Similarly, the
turning point from maturity to decline can occur after a few months (e.g. the hula
hoop) or not be evident after several generations (e.g. Scotch whisky). If the shape
and length of the product life cycle are so irregular and unpredictable, the concept
would appear to have little utility for market planning and decision making.
Part of the problem with the product life cycle concept is that it has never been prop-
erly defined. What does ‘product’ mean? Some studies use the total industry sales
(e.g. computers), others use product forms (e.g. laptops), still others use brands (e.g.
Apple Mac). Each ‘product’ has quite a different life cycle: one can be in long-term
decline while another exhibits rapid growth.
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Sales
Sales
Sales
A fad product A fad with residual
market
Sales
Sales
Sales
Figure 5.2 A pharmaceutical A specialist product A consumer product
Alternative product product
life cycle patterns
To see the managerial implications of these differences, it is useful to show how they
relate to one another (Table 5.2). Market analysis starts not with the product, but
with the needs of customers. A need is a basic requirement of customers. For exam-
ple, customers have needs for transportation, calculating power or energy. Such needs
may persist and grow over centuries, and indeed may never have a decline stage.
Next, at one level of disaggregation, we have a demand for a specific solution to the
need. This is sometimes called a demand-technology life cycle. For example, the
demand for transportation was once met by a coach and horses, now it is met by a
car. The electronic computer has replaced the mechanical comptometer. The life cycle
of these broad product solutions, while shorter than the need curve, can be extremely
long. Next is the current technology curve. While the demand curve represents a
broad technological solution (e.g. internal combustion engine, electronics) beneath
this curve are a whole series of incremental technological changes that make previous
Table 5.2
Concept Definition Typical length Examples
Alternative product
life cycle concepts Need Basic underlying Indefinite Transportation, calculating
requirement
Demand Specific solution Very long Car, computer
to a need
Technology Current state- Short Composite engine, 1 GHz computer
of-the-art
Product Product with Shorter 4-wheel drive SUV, 3 GHz PC
specific technology
Product form Variant of product Very short Open-top 4-wheel drive SUV,
3 GHz notepad PC
Brand Manufacturer’s Long Mini, Intel, Coca-Cola
offer
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Cycles of confusion
processes obsolete. For example, 64-bit technology replaces 32-bit; ceramic filters
replace copper; fibre optic cables replace copper wire and broadband replaces dial-up.
Technology curves can be quite short and are certainly getting shorter.
At the next level of disaggregation, managers make choices. A product curve is a cate-
gory of offer incorporating current technology. For example, companies offer
four-wheel drive Sports Utility Vehicles (SUVs) or a 3GHz personal computer. Next,
line extensions or alternative product forms normally appear, such as open-top SUVs or
3GHz laptops. Both product and product forms may exhibit short life cycles due to
changing tastes and technology. Finally, there is the brand product life cycle. This is
the distinctive offer of a specific business. The brand life cycle can be long or short
depending upon the marketing strategy. Unilever believes that, by incorporating the
latest technology and adapting the product and product form to changing market
conditions, the brand can have an indefinite life. Unilever brands such as Domestos,
Lipton, Birdseye and many others last for generations because they change the tech-
nological, design and service content of the offer while still retaining the brand values.
For managers to talk of a product being at the declining stage can therefore be highly
misleading. First, sales are often resuscitated by new uses and new markets. Second,
for every declining product there are almost invariably rapidly growing technologies,
product forms and brands. For example, total sales of tea have been declining for
generations, but within this total, sales of some product forms such as herbal and
instant teas have been showing explosive growth in recent years.
Weaknesses of the product life cycle

To summarise, for the following reasons, the product life cycle is not of much use for
marketing strategy.
Undefined concept
There is no agreement about the level of aggregation that the concept is supposed to
refer to. Needs, demands, technologies, product categories, forms and brands have
quite different driving forces.
No common shape
However products are defined, there appears to be no standard curve. An S-shaped
curve appears to describe only a minority of products. The actual sales development
is shaped both by outside events and by the strategies of competitors.
Unpredictable turning points

While most products and brands do peak eventually, there is no way of predicting
when the turning point will occur. For some it is a matter of months, for others it
may be generations. Recent research by Golder and Tellis3 found some general pat-
terns in the life cycles of durables, for example they found that:
■ on average the growth stage lasts for eight years at a rate of about 45 per cent
per year
■ the slowdown (a decline of about 15 per cent per year) occurs when around one-
third of potential customers have purchased (i.e. long before the majority own the
new product).
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Unclear implications
Even where a life cycle pattern can be identified, the implications are not clear. For
example, the growth phase may or may not be associated with high profit margins. If
barriers to entry are low and industry competition is fierce (e.g. as in some areas of
electronics), rapid growth can be accompanied by very low profits. By contrast, if
there are low exit barriers and little competition, the decline stage can be exception-
ally profitable (e.g. the foundry supplies business).
Not exogenous
The product life cycle is often the result of management actions rather than being
caused by outside events. Many managers have been taught to think that the product
life cycle is inevitable. When sales have plateaued, rather than looking to upgrade the
technology and search for new opportunities, management has defined the business
as a cash cow and sought to ‘diversify’ into other businesses. In these situations, the
product life cycle becomes a self-fulfilling concept, unless a competitor spots the
unmet opportunity.
For most of the 1990s, sales of two long-established UK confectionery brands,
Cadbury Roses and Nestlé Quality Street declined steadily in volume and value
terms. These two brands comprised the ‘twist-wrap’ chocolate assortment category.
Both companies acknowledged that the brands had become much less relevant and
no longer appropriate as a gift purchase except for mothers or grannies! No invest-
ment had been made in updating the brands, and advertising and promotional
support was drastically reduced. Mars undertook extensive research into the cate-
gory and concluded that the concept of the individually wrapped chocolate
assortment was still relevant with the correct execution and they developed and in
1997 launched ‘Celebrations’ as a brand which people ‘would not be embarrassed to
take as a gift to a bar-b-que’. Today ‘Celebrations’ is the category leader and has
reversed the trend of decline. The sales of ‘Roses’ and ‘Quality Street’ have grown
since the launch of ‘Celebrations’ and other new brands, such as ‘Heroes’ have been
successfully launched.
Product oriented
The core concept of marketing is that the business should seek to meet the needs of
customers rather than focus on selling its products. The product life cycle is a produc-
tion rather than a marketing-oriented concept. By focusing on the product, managers
fail to understand those factors that shape the business’s ability to satisfy the needs of
its customers in competitive markets. The fortunes of the company are tied not to its
products, but to five other primary forces that determine its ability to maintain a
competitive advantage. These forces are as follows:
■ The changing requirements of customers.
■ The objectives and strategies of competitors.
■ The attractiveness of the market to new competitors.
■ The emergence of new technologies that can replace existing solutions.

■ The performance and power of those companies supplying resources, raw materials
and components to the business.
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Market dynamics
These are the drivers that make the product obsolete. A product will die if the needs
of its customers change, if competitors come up with better offers, if new technolo-
gies permit cheaper or superior solutions, or if suppliers to the firm choke off its
ability to satisfy the market profitably. Therefore it is better to tune managers into
concentrating on the causes of change rather than the consequences of it. That way
they can more effectively anticipate developments in the market and create product
strategies that adapt to these opportunities.
Market dynamics
Just as there is no uniform, predictable product life cycle, so there is no standard pat-
tern of market evolution. However, there are common processes that shape markets.
By analysing these processes, managers can anticipate how markets and competition
will develop. From this analysis they can develop strategies both to capitalise on
these changes and to influence these forces of change. Such processes affect each of
the following five ‘actors’ in the industry (Figure 5.3).
Customers
As a market evolves, certain changes can be anticipated among customers. First, the
level of demand changes. Sales are a function of the number of buyers and the fre-
quency with which they buy. In the initial stages, growth can be extremely rapid
because of the number of new buyers being attracted to the market. Eventually this
pool of available non-users diminishes, the market becomes saturated and sales slow
as they become largely a function of repeat purchasing.
A second change to be anticipated is that customers’ expectations will progress. The
primary function of the product comes to be accepted as the ‘norm’ offered by all
competitors. Customers look for additional attributes that add new benefits to the
product; the features we expect as standard on a mobile phone today would have
been available only on the most expensive items just a few years ago. These changes
are not restricted to consumer markets, for example, initially doctors hailed Lilly’s
(then) revolutionary new osteoporosis preventative treatment Evista, which
New entrants New users
New
Suppliers Competitors Customers wants
Substitute Increasing
Figure 5.3 technologies knowledge
Market dynamics
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eventually produced sales of just under $1 billion a year. Subsequently, Merck entered
the market with a different and more effective class of drug (a bisphosphonate) called
Fosamax. The new product was not only superior in the primary function of improv-
ing bone density, but offered additional desirable attributes such as lower dosage and
fewer side effects. Today the market leader is an improved formulation of Fosamax
which has the attribute that a patient needs to take it only once a week. It is now
being challenged by Procter & Gamble’s Actonel and a series of still-to-be-launched
new products over the coming years.
Finally, three factors cause customers to become increasingly price sensitive. First,
customers become more knowledgeable and are willing to shop around. Second,
there are more competitors to choose from. Third, as the market develops, more
price-sensitive customer segments have to be penetrated to maintain growth.
Innovative customers tend to be less price sensitive because they attach a high value
to the new product; later customers have to be attracted by lower prices.
While evolutionary processes in the market push towards slower growth and falling
prices, both can be postponed or forestalled by firms making product or market inno-
vations. By innovative repositioning, the firm can meet new needs, offer new
attributes or create new markets. Such innovations have fuelled resurgent growth and
maintained high prices in many markets, such as those for ‘indulgent’ ice-cream,
alkaline batteries and industrial lubricants. Research by Hogan et al.4 indicates that
innovative customers can be 50 per cent more valuable than an early adopter and
four times as valuable as a late adopting customer.
Competition
Evolutionary processes also lead to certain expected changes in the behaviour of cur-
rent competitors in the market. First, the intensity of competition will initially be low
because the rapid rate of growth makes competition a non-zero-sum game – all can
grow. But later, as the market slows and firms have added to capacity, competition for
customers becomes increasingly intense.
Second, during the latter part of the growth phase, the more aggressive competitors
begin to pursue repositioning strategies that put them into direct competition with
firms that were previously in different strategic groups. For example, until the mid-
1980s, IBM and Apple did not compete head-on. IBM dominated the mainframe
market, Apple the emerging PC market. Then in 1984 IBM, concerned about the
slowing growth in the mainframe market and the expanding purchases of PCs by
its customers, launched its own PC. With this new direct clash between the two
leaders, competition massively increased, producing a rapid shake-out of the
weaker players.
A third change is that during the growth stage winning strategies begin to emerge
and industry leadership tends to become established. The winners are those that have
aggressively built market share in the early stages, moved down the experience curve
and built economies of scale in operations and marketing. As the industry matures,
they have lower unit costs and powerful marketing and distribution systems. The
leaders then are hard to dislodge unless a competitor can introduce radically innova-
tive products or marketing strategies.
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Market dynamics
New entrants
A market is pioneered by one or two companies. However, a rapidly growing market
automatically attracts new competitors – often in large numbers. Sometimes there is
an interval in which patents, lack of technical expertise and uncertainty about the
market’s potential act as barriers to entry. But this interval is now very short in most
industries. Less than a year after Apple launched the first personal computer, it had
10 competitors; eight years later it had 500. Speciality chemical companies expect
their new products to be copied within six months. Internet businesses find their
new ideas copied within weeks.
Today all well-managed companies are scouring the environment for growth markets
that might utilise their capabilities. As the market’s potential becomes less uncertain,
large firms will seek to enter the market. Sometimes they will establish their own
businesses; more often they will acquire one or more of the pioneers. Not only do
existing competitors have to compete with local entrants, but global competition
increasingly becomes the pattern.
As the market enters its mature phase, the number of new entrants sharply reduces
and companies begin to exit. Slow growth normally triggers a shake-out and the
number of competitors declines. The survivors are increasingly those that have pur-
sued the winning strategies of achieving high market shares, broad product lines and
global markets. Consequently, managers in innovative businesses must appreciate
that their lead time is always short and that soon they will be challenged both by
small, nimble followers and by large, resource-rich giants. If they are to survive, their
technological edge must be matched by strategy to build share rapidly and create a
viable brand.
Substitute products and technologies
Over time, managers should expect substitute products and technologies to threaten
their position in the market. A substitute is anything that meets the same customer
need. Concrete can be a substitute for steel in building a bridge, high-fructose corn
syrup can substitute for sugar, Zantac for ulcer surgery. Several factors increase the
threat from substitutes as the market evolves.
First, competitors in adjacent industries are attracted by the growth and profit to be
made in the market. For example, commercial banks once dominated the financial
markets, but in the last decade they have lost share. On the commercial side, the
banks have lost share to securities firms. On the retail side they have lost share to
building societies and non-banks such as ATT and Tesco, which now offer services
such as credit cards and investment funds. Second, needs in the market change,
making old technologies less appropriate. For example, today’s customers find
making a special trip to a bank for a routine transaction a chore. A new bank, First
Direct, has now attracted a million customers by offering telephone and later
Internet and SMS banking; over half of these customers use electronic methods to
conduct their transactions. Unlike old rivals, First Direct has no branches, all the
functions and transactions are available through a 7-day, 24-hour telephone and
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Internet service. Third, progress in adjacent technologies is likely to threaten current

solutions. For example, new plastics that are light and strong increasingly substitute
for steel in car manufacturing. Finally, the government can influence the position of
substitutes through regulations, quotas and subsidies. For example, environmental
regulations are forcing the wind-down of many packaging and chemical products,
and stimulating the creation of new substitutes.
In these situations, management has to decide whether to beat the emerging substi-
tutes or to modify strategies and incorporate the new products and technologies. The
answer will depend upon an analysis of which alternative best meets the needs of
customers, and of the trend in the relative price–performance ratios.
Supply relationships
Entrepreneurial firms depend upon suppliers and subcontractors to facilitate growth.
During the initial stages of the market, obtaining suitable supplies may be a con-
straint on growth (see Higuchi and Troutt5 for an excellent example of this issue).
Those early competitors that can access efficient suppliers or have the resources to
integrate backwards can lever important competitive advantages.
Suppliers can limit the potential of a company to exploit its capacity for innovation.
Porter suggests that a supplying group is powerful where the following conditions
apply in the market:6
■ It is dominated by a few suppliers and is more concentrated than the industry it

sells to.
■ It is not obliged to compete with other substitute products for sales to the industry.
■ The industry is not an important customer of the supplier group.
■ The supplier’s product is an important input to the buyer’s business.
■ There are high switching costs in moving away from the products of the supplier
group.
■ The supplier group poses a credible threat of forward integration.
In general, supplier power diminishes as the market grows. Nevertheless, control and
power over suppliers can offer a sustainable competitor advantage. For example, Wal-
Mart’s long-term relationship with its suppliers, its skill in influencing their design
and processes, and its ability to negotiate strongly with them have been central to
the company’s success in creating the world’s largest retail firm.
The evolution of markets
These five key components described above are affected by evolutionary forces. For
convenience, these developments can be divided into four phases.
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The emerging market

A new market is triggered by an innovation. This innovation may be: a new product
or a new service that is superior to earlier ones; a new marketing concept that creates
a new set of customers; or a process innovation that dramatically cuts costs or
increases the availability of a product.
For an innovation to succeed it has to offer benefits that customers perceive as superior
to current solutions. The customers who perceive this benefit first and who can act on
this perception are called innovators. Innovators are normally not price sensitive
because they value the benefit highly and do not want to wait for competition to bring
prices down. The central marketing task at this stage is to segment the market with the
aim of identifying those buyers most likely to benefit from the performance or the
promise of the new product. Typically, some potential customers will benefit hugely,
while others perceive very little benefit at all. The former are the ones to target.
When the first commercially available mobile phone (the Motorola DynaTAC) was
launched in 1983 it weighed half a kilogram and cost the equivalent of $6,500 at
2004 prices.
The notion that wealthy individuals were the original target segment is unfounded
although it is certainly true that some were sold as a ‘status symbol’. The main target
was usage in industrial markets with the key early adopters coming from the freight
transport industry where truck drivers could update their progress in order to opti-
mise the utilisation of the costly fleet. Other less salubrious early adopters of the
technology included drug dealers!
Most potential users could not justify the initial expense as the costs outweighed the
benefits of ownership.
At the beginning, sales growth is normally slow, and buyers have to be informed
about the innovation and persuaded of its benefits. Uncertainty, high switching costs
and the lack of established distribution and service infrastructures also restrain
buyers. Barriers to adoption are more easily broken down when the new product has
the following characteristics:
■ It has a major performance advantage that is easily demonstrated.

■ The cost of switching into it is low.
■ The cost of product failures is limited.
■ Support requirements are small.
■ Buyers in the segment have the resources to change.
Once the innovators begin to adopt the product, the market may grow very fast,
fuelled by the penetration of the large non-user group.
Competition is initially weak. The pioneer’s main competition comes from the older
technology. New entry is temporarily forestalled by barriers that include the following:
■ Patents.
■ Lack of technical know-how.
■ Uncertainty about what customers want.
■ Lack of expertise in sourcing supplies and parts.
■ Shortage of risk capital.
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Unfortunately for the innovator, such barriers to entry tend to crumble very rapidly.
Movements of personnel, the spread of knowledge and the adaptability of aggressive,
fast followers soon erode the leader’s temporary monopoly. Within a year, there are
likely to be several new entrants in the market.
The high-growth phase
The high-growth phase is characterised by the expansion of the market to new cus-
tomer segments and new uses. These are stimulated by the spread of knowledge
about the product beyond the innovator group, the reduction of uncertainty about
standards and switching costs, and the inevitable decline in prices. As prices fall, the
new product becomes increasingly attractive to customers who perceive only a
modest advantage in it.
The number of competitors often grows strikingly high. For example, in the motor-
cycle industry, at its peak, there were 136 manufacturers in the UK alone and an
estimated 700 worldwide. The Internet boom in the late 1990s saw a similar flood of
entrants. They were attracted by the rapid growth and potential profitability of the
market. In addition, development of a strong infrastructure of subcontractors and dis-
tributors facilitates entry. Prices generally fall rapidly as experience and scale
economies lower unit costs, and competition increasingly forces most of these gains
to be passed on to the customer.
In the later stages, as the growth rate begins to slow, competition for market share
intensifies. The leading players begin to develop global ambitions and to broaden
their product lines, pushing them into markets and segments occupied by other
strong competitors. Companies that have not developed strong market positioning
strategies or achieved low-cost structures begin to see their profit margins falling, and
more are forced to exit the market.
The mature phase
Market maturity occurs when the number of new users and new uses dry up. The
marketing focus then has to switch from attracting non-users and creating new uses
to maintaining or gaining market share. Since current users are more experienced,
price and service become more important. Difficulties in finding new uses for the
product, and additional attributes to differentiate it at this stage of market, heighten
the drift towards commodity status.
Competition has normally become fierce. There is excess capacity, the market is zero-
sum and the inroads of international competitors tend to increase the pressures on
companies. Two other factors amplify these pressures on margins. Dealers become
more powerful. They can play off alternative suppliers and may introduce their own
brands. Second, it is harder for competitors to reduce costs because most of the scale
economies and experience curve effects have already been obtained. The shake-out of
marginal competitors then usually proceeds rapidly through amalgamations,
takeovers and bankruptcies.
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At the late stage of maturity, the market may consolidate around a handful of large
competitors that effectively create barriers to entry. These barriers centre around the
scale economies they possess, the high capital requirements, the advantage of estab-
lished brand names and the implicit threat of sharp retaliation that newcomers may
face. Markets that have matured into this oligopolistic pattern include the oil indus-
try, the supermarket sector and the detergents business.
While internal competition in the industry may become more constrained, competi-
tion from substitute technologies is likely to grow over time. For example, continual
improvements in plastics and composites add to the problems of steel producers seek-
ing to maintain volume. Such companies then face the dilemma of a vain attempt to
fight off the threat or a substantial investment in acquiring and adapting to the sub-
stitute technologies.
The decline phase

A new stage is reached when the market enters a period where volume looks set for
permanent decline. This occurs when the pool of potential new users and new uses
has dried up, when substitute products have demonstrated clear superiority or when
buyers’ needs change.
Characterising the market as ‘in decline’ can be a dangerous mistake. Many markets
have developed new sources of growth after entering what appeared to be the decline
phase. Resurgent growth can be created by new products, new users and new uses.
The motorcycle market declined by 50 per cent in the 1960s, then exhibited explo-
sive growth as new younger customers bought motorcycles as a fun product rather
than as a cheap form of transport. Nylon has been written off many times, but as
Figure 5.4 and Box 5.1 illustrate, new uses have continually fuelled resurgent growth.
Key Carpet yarns Carpet

500 M = Material influences (P)
Cumuloft 501, etc.
400 P = Product influences Textured yarns Textured yarns
Actual (M) Sweaters, Men’s hose, etc.
300
Trend Tyre cord
200
Warp knit
Growth contributions
Tricot, raschel, etc.

Million million lb
100 Tyre cord

Broadwoven
Circular (P) Taffetas, twills, sheers,
knit (M) marquisettes
50 Warp
Circular knit
40 knit (M) (excluding textured)
30 Women’s hosiery, etc.
20 Miscellaneous
Narrow fabrics, rope,
Broadwoven thread, parachutes
10 (M)
Figure 5.4 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962
Extending the Year
market: the case
Source: Jordan P. Yale, ‘The strategy of nylon’s growth’, Modern Textiles Magazine, February 1964, p. 33
of nylon
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A Century of nylon innovation (1930–2030)

Time scale 1935 1959 1960 1999 2000 2030
Paradigm Entrepreneurial Mass production Lean production
Mandate Invent Develop Scale Refine Integrate Reconfigure

Locus Mind Laboratory Semi-works Factory Field Market
Key skill Creativity Science Engineering Technology Applications Usage
Knowledge Outliers Poly-chem ChE/ME EE/CS IndE Psychology
Source Inventors Academe Profession Producers Assemblers Retailers
Structure Individual Entrepreneurial Expeditious Centralised Distributed Networked
Progress Breakthroughs Continual Monumental Incremental Game-change Step-change
Benefitter Participants Products Process Business Industry Consumer
Key attribute Substitutability Produceability Uniformity Quality Responsiveness Delight
Key measure Morale Potential Volume/yield Cost Margin/scope Programmability
Box 5.1 Reinventing nylon

Inventing nylon (1928–1937)
Starting in 1909, Du Pont started broad-based research into nitrocellulose. About that time, Irénée du Pont, great
grandson of the founder, had his Experimental Station gather information on the manufacture of artificial silk, artificial
leather, and celluloid. The stage for a great consumer-oriented company would first have to wait for the end of the First
World War, but would soon be graced with a monumental technical performance.
In 1920, the French sold Du Pont the technology for making artificial silk. Later that year, the Du Pont Fibersilk Company
was formed and soon began the manufacture of an artificial silk, later to be known as rayon. With that start in synthetic
materials, the stage was being set for the invention of nylon, or, at least, the props had arrived.
In 1924, Charles Stine as the new director of the Chemical Department, made his characteristic mark on its direction.
He elevated the role of ‘theory’ in the laboratory, organised the common scientific bases of Du Pont’s products, dropped
empirical chemical control from his charter, and, yet, insisted on the indispensability of an intimate touch with the various
industrial products. He revitalised the department, so that by the late 1920s, he asked for and got the Executive
Committee to fund ‘general investigations’ of a scientific nature. Now, with the Committee’s commitment, Stine set out
to get the commitment of the best talent in the land.
For Du Pont, the inventing of nylon begins in 1928 with Stine’s wooing of Dr. Wallace Hume Carothers from a teaching
and research position at Harvard. He only agreed to join Du Pont on the promise that he would be allowed a completely
free hand to do fundamental research in the pursuit of pure science for knowledge’s sake. In 1930, within what must
have been the most productive month on record, Carothers’ group of eight, six of whom had PhDs, had produced the first
samples of Neoprene and the first laboratory synthetic fiber. A later variant of that synthetic fiber still had a couple of
textile deficiencies. It would melt under a pressing iron and would dissolve in dry cleaning solvents.
The Great Depression and Stine’s promotion to the Executive Committee put pressure on Carothers’ fundamental
research to ‘pay more of its way.’ This caused Carothers considerable anxiety, and even led him to inquire about returning
to Harvard. Then on May 24, 1934, on the suggestion of Carothers, one of his assistants drew a sample of synthetic
fiber which overcame the melting problem of earlier attempts. This fiber, remarkably like silk, was nylon! Ultimately, a
‘cousin’ of this fiber (known technically as nylon 6,6) became Du Pont’s must celebrated product. It was first prepared on
February 28, 1935 during the process of trying all 81 possible variants of nylon.
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Commercialising nylon (1937–1942)

From these beginnings, the commercialisation of nylon proceeded from feasibility to practicability to repeatability, each
phase taking roughly 18 months. Early on it was decided to tackle the challenge of substituting nylon for silk in woman’s
full fashioned hosiery without having to raise the price. Not until the end of 1937 were the first stockings knit. The
Experimental Station worked on eliminating breaks due to bubbles in and fouling of the extrusion holes. The bubbles are
no longer a problem, but the fouling of the extrusion holes persists to this day. In January, 1938, the Executive
Committee authorised a pilot plant of roughly one-tenth of expected production. The pilot plant in Seaford, Delaware
subsequently got a series of expansions up to its current million pound a day capacity. A second plant dedicated to nylon
production was started in Martinsville, Virginia in 1940. Du Pont’s experience with cellulose based products, Rayon and
acetate, was vital to the rapid commercialisation of nylon.
Nylon was an instant market and financial success when it became available in May of 1940. Production of $9 million
sold out with a 33% profit. In the year before World War II, 1941 [sic], profits were $7 million on sales of $25 million. Du
Pont made the nylon for over 60 million pairs of sheer women’s hosiery, more than the number of women in the United
States at that time! Meanwhile, Du Pont’s Pioneering Research began the development of products destined to become
Orlon®, Cordura® and Dacron®.
Nylon emerges (1942–1959)

Nylon uses started appearing as soon as this synthetic fiber was available. Civilian uses, just before the Second World
War, had extended to toothbrushes, fishing lines, neckties, sewing thread, jewelry bead cord, football pants, and
foundation garments. During World War II, all nylon production was earmarked for the war effort. The military used it in
3.8 million parachutes, a half a million airplane tires, and for an uncounted number of glider tow ropes, flak vests, and
blood plasma filters.
After the World War nylon uses vastly expanded and ended up split somewhat evenly, by revenues, into three categories:
textiles, carpets, and industrial. The nylon textile uses expanded into dressware, blouses, shirts, suit linings, and shells.
Nylon carpets made their first appearance in the late 1940s. During the 1950s, nylon texturing and carpet tufting
advances facilitated the rapid development of this market. Industrial nylon (that class of products requiring high strength
and durability, such as tire cord and flak vests) also made its commercial debut in the late 1940s. Examples of such
uses are in nylon cord (as tire reinforcement and ropes), bulletproofing, luggage, and sporting gear. These new uses
justified Du Pont’s investment in additional plant capacity. Nylon was produced in new plants in Chattanooga, Tennessee
(1948) and in Camden, South Carolina (1950).
About this time, sensing that the demand for nylon could be overwhelming, and perhaps volatile, Du Pont licensed nylon
to Chemstrand in 1951 by building them a 50 million pound per year plant for $110 million. The prospect of anti-trust
litigation figured heavily into that decision, as did the prospect of having idle plants in the event that demand dropped off
or a superior material appeared. The increasingly competitive environment, partly of Du Pont’s own doing, was the
impetus for a most ambitious technical initiative, called ‘Blue Sky Technical Nylon Technology Task Force.’ This
multifunctional (Engineering and Technology) initiative begun in 1955 was chartered to reduce the capital and labor
production costs by 50% and 75%, respectively. It succeeded, although not to that extent, and secured a foundation for
growth. Its leader, Edward R. Kane, later became president of Du Pont.
Nylon growth (1960–1980)

Overall, the worldwide nylon market enjoyed a 10.5% compounded annual growth throughout this twenty year period
going from 1 billion pounds to 7.5 billion pounds annually. Textile consumption grew at about 7.5% per annum, while
carpet and industrial consumption grew at over 12%. The radical shift to continuous processing of nylon was delivering
quality and profitability beyond all expectations. And it continues to do so for longer than could have been predicted.
Nylon’s growth was also sustained by an unrelenting progression of product extensions and process refinements. Fiber
cross sections were manipulated to give optical and tactile effects. Antistatic treatments were developed in the 1970s.
Faster spinning of yarns reached a point where they travel through the factory over 180 miles per hour (almost a football
▼
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field’s length per second). In carpets, the biggest innovation was the bulked continuous filament (carpets made from a
single strand of yarn across its length). This was followed by hollow fibers coupled with unprecedented dye, luster, and
bulk uniformity. Extensive work on molecular orientation led to expanded strength, shrinkage, and fatigue resistance for
industrial fibers.
Despite this growth and progress, the 1970s were the first difficult times for nylon. The oil shortages of 1973 and 1979
hit nylon hard. After years of producing half of Du Pont’s profits, nylon made no profit in 1975. New products took
prodigious time and resources to develop: Kevlar® took 15 years and $500 million; Reemay®, Typar® and Tyvek took
roughly 15 years and about $100 million, each. Corfam®, a leather substitute, failed at a cost of over $70 million.
Consequently, in 1975 some nylon areas were directed to be cash generators and Fiber’s research was cut accordingly.
Just as an aside, during this time (and on until 1992), nylon was organisationally grouped with ‘Fibers.’ ‘Fibers,’ for the
technically interested, included those materials which shared a common chemistry (aramid based polymers) and
common uses (as threads, sheets, or solids). Strictly speaking, Kevlar®, Reemay®, Typar®, and Tyvek® are only
‘relatives’ of nylons.
Nylon maturity (1980–)

The current mature era of nylon is marked by a focus on finance. After the second oil shortage, Du Pont acquired Conoco
(as Continental Oil) for $7.6 billion in 1981. This was done to insure a source of petroleum based feedstock, and
coincidentally, is an earnings hedge. During the 1980s, the amount of capital made available for upgrading Du Pont’s
nylon plants was around 30% less than comparable companies such as 3M, Monsanto, Procter and Gamble, and Kodak.
The capital starvation got so severe that power outages threatened production because critical improvements to the
plants’ on-site power conversion units were not funded.
Labor, too, was cut back. Technical professionals were reduced by 50% during the 1980s. During the 1990s, both
technical professionals and factory personnel were cut back 25%. Only competitors who were exiting the nylon business
experienced comparable cuts. Understandably, anxiety was high and morale was low.
Meanwhile, competitors were installing the latest plants with, of course, the improved economics technological progress
brings. Furthermore, these new plants represented additional capacity at just the time that polypropylene was becoming
a substitute for some of the high volume applications of nylon, such as, commercial and outdoor carpet.
Another pressure on the Nylon business for Du Pont was the market for ‘specific solutions.’ This led to a proliferation of
product variations, and may have been better handled by the newer plants of competitors. Du Pont’s mass production
factories were not designed for high flexibility, and could not economically keep pace with the variety proliferation. More
pressure came from customers who were backward integrating. That is to say that some mills were buying not nylon
bobbins (as the 10 pound spools of thread are called), but rather nylon flakes and these aggressive mills were doing their
own melting, extruding, and spinning of nylon. And of course, these mills were not paying Du Pont the last 10% that
those processes had customarily commanded. Further, what mills learned about nylon, with most fundamental patents
long expired, may be enticing some of them to further backward integrate.
In the spring of 1994, Du Pont made the strategic decision to stay in the nylon business. You could say that Du Pont has
superbly positioned nylon to enter a dramatic new phase of renewal, the era of ‘Lean Production.’ Nylon (6,6 Du Pont’s
mainstay) is being integrated with its cousins Nylon (6), polyesters, and both are benefitting from cross-fertilising their
process know-how with each other and with the latest developments in biosciences. This blending of polymers also
enables dramatic downstream, low investment, spinning technology possible. All these foregoing developments herald in
a new century of lower cost, waste free, energy efficient nylon!
Source: http://www.cha4mot.com/p_jc_dph.html
Even if the decline phase looks certain, the strategic implications are not clear. The
usual recommendation from advocates of product life cycle theory, or portfolio con-
cepts such as the Boston Consulting Group’s matrix, is to divest from the market. But,
in practice, such a view can be a costly oversimplification. Many markets in decline can
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be highly profitable and substantial cash generators for a very long period if managed
properly (e.g. the cigarette market). Further, today there are many more declining mar-
kets than in the past. Slower world economic growth, rapid technological change and a
fast-changing environment make the management of declining industries an impor-
tant issue for most firms. The appropriate strategy depends upon how the evolutionary
process affects the pattern of declining demand and the intensity of competition.
A market does not decline in a homogeneous pattern; rather, the more innovative
segments leave the market for new alternatives, leaving behind customer groups that
are reluctant or unable to change. Often these remaining customer groups are conser-
vative and price inelastic. This occurs where, perhaps because of habit, the product is
perceived as important to them. Other factors may be a lack of acceptable alterna-
tives, if it is not seen as a major cost element in the budget, or if past long-term
advertising has built up strong brand loyalties. In these situations, the remaining
competitors may be able to push up prices to offset the decline in volume.
Whether this is possible depends upon the intensity of competition. Factors that may
damp down competition, allowing the survivors to earn reasonable returns, are as follows:
■ When there are only a small number of large, evenly balanced competitors
remaining in the market.
■ If general agreement exists that the market will continue to decline, so that costly
battles to win market share look unattractive.
■ If significant non-price differences exist between competitive products, so that
they are not perceived as commodities.
■ If exit barriers are low, so that it is not too costly for competitors to leave the
market as prospects decline.
■ If fixed costs are relatively low, so that total costs decline in line with volume.
In some markets (e.g. heavy chemicals) these conditions are clearly not present. Here
fixed costs are high, there are major international competitors pursuing varying
strategies, plants are highly specific and buyers regard the product as a commodity. In
such markets the decline stage is often characterised by intensive competition,
ruinous price wars and large losses. But in other markets (e.g. cigarettes), the decline
stage can be slow and highly profitable for the remaining players.
An interesting contemporary example is the product life cycle of Aspirin. Launched
in 1899, Aspirin was the branded name of Acetyl Salycilic Acid (ASA), invented by the
Geman company Bayer. At the end of the First World War Bayer had the trademark
confiscated and it was sold to Sterling in the USA. The name Aspirin has become a
generic term even though Bayer still owns the trademark in a number of territories.
Sales of ASA under a variety of different brand names grew until the early 1960s when
Paracetamol was commercialised. This had the advantage of fewer gastro-intestinal
side effects than aspirin. In 1969, Ibuprofen was launched which had even fewer side
effects than Paracetamol. From the 1960s up until the mid-1980s sales of ASA slowed
and in 1988 the Food and Drugs Administration (FDA) instructed manufacturers to
print warnings that ASA products should not be given to children because of the asso-
ciation with Reye’s syndrome, a serious disease affecting the liver and the brain.
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Many companies with brands based on ASA changed the formulation to Paracetamol
– e.g. Anadin, which had none of the problems associated with ASA-based products.
Aspirin sales continued to decline. By 1997 global sales of ASA products had dropped
to about $2 billion. Table 5.3 shows the sales indexed to 1997 levels.
Table 5.3
1988 1999 2000 2001 2002 2003
Global sales of
Acetyl Salycilic Acid 1997 = 100 99 98 94 92 90 99
The decline continued until 2002 and from then sales have started to increase again,
growing a very strong 9 per cent in 2003. While marketing managers had been
investing in brands based on Paracetamol and Ibuprofen and even deleting the ASA-
based brands, research was published to show that ASA had a role to play in the
control of heart disease. In addition it has been claimed that taking ASA before travel-
ling long-distance on aeroplanes can minimise the incidence of deep-vein
thrombosis. The incidence of heart disease is growing in most developed countries
and long-distance air travel is also growing in real terms and so these present new
opportunities. If marketers had not deleted the ASA brands they would have been
able to promote them actively for these new indications and indeed many are now
trying to exploit the opportunity by launching new brands.
Porter identified four strategic options available to the business in the decline phase:7
■ Leadership. The firm invests in acquisitions and other market share-building strate-
gies to rationalise and dominate the market. This is a high-risk strategy justifiable
only if management are convinced that the resulting market structure will allow
the firm to recover its late investment.
■ Niche. The firm focuses on a segment that is more robust and price insensitive
than the mass of the market. Again this may be a difficult strategy, since the
remaining competitors are likely to target such a segment.
■ Harvest. Here the firm seeks to optimise cash flow rather than market share.
Harvesting strategies involve cutting costs, raising prices and rationalising the
range of products, customers and channels. This strategy is most attractive if the
firm has been a strong player in the market. If it has not been recognised as an
industry leader, the harvesting strategy will normally lead to a rapid collapse of
volume, thereby eliminating any gains to be obtained from the strategy.
■ Divest. Here the business is sold off to maximise its net investment recovery. This
strategy is likely to be profitable only if a decision is made early in the decline
phase. If left till later, or after the business has been harvested, there is not likely to
be much interest in an acquisition.
Choosing the right strategy depends upon analysing the strength of the firm’s competi-
tive position and assessing the evolutionary processes affecting the market. If the firm
has a strong position and the decline phase is expected to be steady and without bruis-
ing price wars, the attractiveness of a leadership or niche strategy is enhanced. On the
other hand, if the company has no marked advantage, if no robust niches are apparent,
and if the products are seen as commodities, rapid exit may be the best alternative. The
earlier the oncoming decline phase is recognised and the better the evolutionary char-
acteristics are understood, the more options are available to management.
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Fo r m u l a t i n g m a r k e t i n g s t r a t e g i e s
Formulating marketing strategies
The marketing strategy that management should adopt depends upon three factors.
First, what is its competitive position? Is it a market leader or a challenger? Second,
what is its strategic objective? Is it seeking market dominance or merely to carve out
a profitable niche? Third, at what stage is the market? Is it in its early growth stage or
does it look to be in late maturity? The appropriate marketing strategy under these
various circumstances is discussed next.
Strategy for the market pioneer

The pioneer is the company that initiates the market through a major new product
(e.g. SmithKline’s Tagamet), the introduction of a new marketing concept (e.g. Dell’s
development of direct marketing as a channel to sell computers), or the creation of a
new process which dramatically cuts operating costs or enhances availability (e.g.
Amazon.com’s Internet bookstore).
The pioneer has the opportunity to obtain significant first-mover advantages that can
translate into future market leadership and high returns. The main advantages are as
follows:
■ Demonstrable differential advantage. Normally the innovation has clear and deci-
sive advantages over the product or concept it replaces. For example, Tagamet was a
much better solution to treating ulcers than surgery! Subsequent entrants have the
tougher job of proving that they are better than the pioneer which introduced the
change. GSK successfully challenged the pioneer brand Tagamet with Zantac using
marketing muscle and superior clinical claims and became the category leader.
■ Higher prices. The innovator segment is normally not price sensitive, allowing the
pioneer to earn high margins. Later entrants have to offer lower prices because the
market becomes more price elastic and because they have to create a differential
advantage against the first mover. The price reductions in mobile phones are a
clear example of this process in action.
■ Switching costs. Once customers have adopted a pioneer’s product, they are often
reluctant to change. The costs and risk of another change may make it relatively
easy for the pioneer to hold on to its early customers.
■ Economies of scale and experience. Being first allows the pioneer to build scale
economies and move down the experience curve ahead of potential rivals. With
this cost advantage it can finance either aggressive pricing or additional marketing
investments to boost its share of the market.
Certainly there is evidence that on average pioneers earn higher profits and achieve
bigger market shares. The influential PIMS database of 3,000 strategic business units
in 450 companies reveals that pioneers earn an average return on investment 35 per
cent higher than late entrants. Also, 70 per cent of the companies currently holding
the leading share in their markets report being ‘one of the pioneers’.8 Other studies
show that surviving pioneers in a market held on average a market share of 29 per
cent when the industry reached maturity. This compares to an average of 17 per cent
for early followers and 12 per cent for late entrants.9
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But these average figures can be misleading. Some pioneers such as Dell, Glaxo,
Finland’s Nokia, Denmark’s Novo and Sweden’s IKEA did extraordinarily well. Many
others fail to exploit their innovations, are rapidly caught up by new entrants, and
soon disappear. Being first is insufficient. Today there are two additional require-
ments. First, the pioneer needs to move fast into the main markets to exploit the
innovation. Competitors can be exceptionally quick to copy winning formulas.
Recently Glaxo, planning to launch its new product in South America, found that
three local competitors had already copied its compound and launched it locally. The
inventor entered as a me-too! Similarly, years after Federal Express had launched its
revolutionary air courier system in the United States, it entered the European market.
The result was a disaster: competitors such as DHL and TNT had copied the Federal
Express system and were already well established in Europe.
Not only has the innovator to move fast to pre-empt competition, but it has to move
in big. Unless the pioneer succeeds in expanding the market and obtaining significant
levels of distribution, it will fail to exploit its strategic window and first-mover advan-
tages. If the pioneer succeeds only in establishing a small niche, the window remains
open for new entrants to be first to capture the attention of the mass of customers.
When this occurs, fast followers obtain the scale economies and capitalise on the
innovation, giving them the opportunity to sweep aside the pioneer. This presents a
real problem for smaller, innovative companies. Moving fast and big requires large
resources to build capacity and invest in aggressive marketing efforts. To exploit their
opportunity, small companies may have to look at licensing, joint ventures or co-
marketing to leverage their resources. Small may be beautiful for making innovations,
but it is not for exploiting them.
Management writers have often oversimplified the strategic options facing the pio-
neer. It is frequently presented as though the pioneer has a choice of aiming at a mass
market or a niche. Correspondingly, the strategy choice is suggested as market pene-
tration or market skimming. But these choices are artificial because they ignore how a
market evolves. In practice, a successful pioneering strategy should systematically
shift from niche to mass marketing and from what appears as a skimming strategy to
one that might be termed penetration.
This is illustrated in Table 5.4, which contrasts the strategy desirable for a pioneer
seeking to achieve market leadership, first at the early phase of the market and then
at the later growth stage. At the beginning, the strategic objective of the pioneer
should be rapid growth. The strategic focus will be to expand the market by encour-
aging non-users to purchase. The non-users to be targeted initially will be the
innovators – those who first perceive a real benefit from the product and who have
the resources to purchase. The competitive strategy is to pre-empt new entrants by
exploiting as quickly as possible new market segments and emerging distribution
channels. Initially the core strategy will focus on the superior performance of the
product compared to previous products or technologies. Turning to the marketing
mix, the range will be limited to a single or small number of products because the
initial market segment will be a narrow one. Because early buyers are not normally
price sensitive, the price should be relatively high. Promotional and advertising
spend, however, will be very important to build up awareness and interest in the
market. Again because of the initially restricted nature of the market, distribution will
be relatively narrow.
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Table 5.4
Strategy Early phase Later growth
Marketing strategy
for the pioneer at Strategic objective Rapid growth Rapid growth
the early and growth Strategic focus Expand market: convert Expand and penetrate
phase of the market non-users, enter market: new users,
new segments new uses, new products
Customer targets Innovators and early Later adopters, create
adopters new segments
Competitor targets Pre-empt new entrants Many
Core strategy Perceived value Matched to segment
Marketing mix:
Product range Narrow Broad
Price High Varied and lower
Promotion High High (declining %)
Distribution Selective Broad
As the market moves into the growth stage, the marketing strategy needs to change.
The strategic objective is still fast growth, but the focus moves on to developing new
market segments, finding new uses for the product and building market share. The
target market must change from the innovators to the more typical segments that
constitute the mass market. The business is now likely to have important competitors
whose strategies need to be analysed and understood if competitive advantage is to
be maintained. The core strategy now becomes more complex: the company is now
likely to have a variety of offers, each aimed at a target segment and each seeking to
present an appropriate differential advantage.
The marketing mix should also change during the growth stage. The pioneer should
broaden the product range to present attractive offers to the evolving market segments.
Average prices will come down as the company seeks to penetrate the more price-sensi-
tive segments of the mass market. However, the business should seek to introduce
innovative new products in the range that can obtain premium prices and encourage cus-
tomers to trade up. High advertising and promotional expenditures will still be necessary
to support the company’s market share aspirations. Finally, it should be seeking to
broaden distribution channels to increase availability and service to its target customers.
As the market reaches maturity, the strategy should continue to evolve. Here the
objective will normally shift to defending market share rather than aggressive
growth. Recently marketing academics have found the writings of military strategists
such as Clausewitz and Liddell-Hart illuminating for discussing the defensive options
open to companies seeking to maintain the leadership positions they have built up.10
Position defence
The crudest defensive strategy is to seek to build an impregnable fortification to pro-
tect one’s territory.11 The weakness of this static form of defence is often illustrated by
the calamity of the Maginot Line built by the French in a vain attempt to prevent a
German invasion. When war came, the Germans simply went around rather than
through it. In marketing terms, position defence means seeking to protect one’s cur-
rent products and technology. It is a form of ‘marketing myopia’. Current products
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are always vulnerable to changing technologies and tastes. No amount of defensive

advertising or pricing can prevent the product’s obsolescence caused by the evolu-
tionary forces in the market. An illuminating example of this strategy is given by
Kodak, which for decades dominated the traditional camera film market and
attempted to protect its position by developing higher-technology solutions like
single use cameras and the APS system in the early 1990s. The company did not
directly respond to the emerging digital camera technology and the impact is shown
clearly in the stock market performance of the company in Figure 5.5
Up until early 1997 the share price of Kodak moved in step with the Dow Jones
Industrial Average Index. Since then the Index has more than doubled whereas the
Kodak share price had lost two-thirds of its value. It was not until 2003 that the com-
pany formally announced its strategy of focusing on digital photography, including
cameras. An irony which will not be lost on Kodak investors is that the company
took out patents on digital camera technology in 1976, but never exploited the intel-
lectual property because the visible profits were so much larger from traditional film.
Flanking defence
A flanking defence can be used to support a position defence strategy. To protect
against an attack directed at a weakly defended area (its exposed flank), the leader
erects additional defensive outposts. In marketing terms, a common flanker defence
is the launch of a fighter brand. If the leader’s major brand is threatened by a com-
petitor’s new aggressively priced product, it can reply by launching a cheap brand
that undercuts the new product. This prevents the newcomer from making progress
in the market, while hopefully leaving relatively untouched the leader’s major brand.
An example is HBOS, a leader in the UK domestic savings market with its Halifax
brand, which is a key driver of margin for the whole group. In order to try and
defend its leadership position while not diluting margins, the company makes use of
its Birmingham Midshires brand to attract new customers by offering higher interest
rates than the main brand.
US:EK Daily DJIA

60
Millions
40
Figure 5.5 20
Stock price of Kodak 0
95 96 97 98 99 00 01 02 03 04
compared to the
Volume
Dow Jones Industrial
Average
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Pre-emptive defence
Whereas a flanking defence responds after an attack, a more aggressive strategy is to
attack the potential challenger before it starts seriously threatening the company. For
example, when it was learned that the Japanese intended to sell steel bearings in
Europe, the market leader, Sweden’s SKF, slashed prices on its matching range by 40
per cent, dramatically undercutting the challenger’s expected prices. This strategy
proved successful in maintaining market share, but it was extremely costly in eroding
SKF’s bottom line.
Sometimes, the leader will seek to avoid the cost of a massive pre-emptive defence by
market signals – threatening huge price cuts if a competitor moves into its market.
The company seeks to deter new entrants by making it clear that it will defend its
position at all costs. For example, when a leading European supermarket group pro-
posed to introduce its own-label colas, Coca-Cola responded by telling the company
that it would reduce supply prices to the supermarket’s competitors by 20 per cent in
response. The group decided it could not afford to risk attacking Coca-Cola.
Counter-offensive defence
Generally, the leader will respond to a challenger that attacks it. It usually pays the
leader to attack where the challenger is most vulnerable. A few years ago the boxed
chocolate market in the UK was dominated by the Cadbury Milk Tray brand, with
Nestlé Dairy Box a very poor second player. The newly appointed Marketing Manager
for Dairy Box wanted to attack the leader by providing customer incentives via the
retailers which would encourage purchase of the smaller brand during Easter, one of
the key seasonal gift giving occasions. The leading brand responded by providing the
retailers with larger incentives to sell Milk Tray as they did not wish the brand to end
up in a price war.
Mobile defence
A mobile defence involves the firm broadening or diversifying its market focus to
strengthen its strategic defence capabilities. Generally this involves the company
redefining its business from a product to the underlying need. For example, Tesco,
one of the world’s most successful supermarket chains, has redefined its objective of
‘share of household grocery budget’ to ‘share of household budget’, so the Tesco
offering is constantly expanded and now includes clothing, homeware, electric and
electronic goods, banking and insurance services. The aim was to deter competitors
in adjacent technologies from eroding its customer base.
Contraction defence
A leader sometimes has to recognise that it lacks the capability to defend its whole
range of products against competition. It may decide to withdraw from those areas
where it lacks comparative advantage and to refocus resources around certain core
markets. In September 1999 Unilever announced its intention to focus on fewer,
stronger brands to promote faster growth. The company aimed to reduce the number
of brands in its portfolio from 1,600 down to 400 focusing on familiar brands such as
Dove, Lux, Lipton, Magnum and Calvin Klein fragrances. In its bid to concentrate on
fewer, core brands, Unilever disposed of 27 businesses during 2000 for approximately
$642 million (£404.7 million). The company sold the European Bakery Business,
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Benedicta, a culinary business in France, and various other small businesses and
brands. Unilever continued to sell businesses, and in 2002 sold around 20 of its
brands including cleaning firm DiverseyLever and cooking oil brand Mazola.
Many companies do become too diversified. On the other hand, surrendering seg-
ments to competition does offer the latter a beach-head, which in the longer run can
be expanded to a general attack on the firm’s core markets. These various defence
options are summarised in Figure 5.6.
Market challenger
A market challenger is a company that seeks to wrest the leadership of the market
from the current front-runner. These challengers may be small entrepreneurial com-
panies, or large businesses such as Pepsi and Vodafone. The appropriate marketing
strategy will depend upon whether the challenger is attacking in the early or late
phase of the market.
Attacking a market leader is difficult. Normally the leader’s share superiority will
mean it has lower unit costs, achieves higher trade prices and consequently possesses
much stronger profit margins.12 The leader usually has the resources to pursue a pun-
ishing defence.
Attacking a market leader is easier when it is pursued at the early stage of a market’s
evolution. This is particularly the case where the pioneer has not aggressively expanded
(2) Flanking defence
(3) Pre-emptive (1)

defence Position
(4) Counter- defence
Attacker
offensive Defender
defence (6)
Contraction
defence
(5)
Mobile
defence
Figure 5.6 Source: Philip Kotler and Ravi Singh, ‘Marketing warfare in the 1980s’, Journal of Business Strategy, Winter 1981,
p. 36
Defensive strategies
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the market beyond the small innovatory niche. There are a number of reasons why the
pioneer may react only weakly against a determined challenger. One is that it may lack
the resources after the heavy R & D programme that preceded the launch. Second, the
market is non-zero-sum: there is room for both to grow. The challenger is not stealing
the pioneer’s customers, but rather attracting non-users to the market.
A challenger too has a number of advantages over the pioneer. The challenger can
allow the pioneer to take the initial risks and then capitalise on its weaknesses and
mistakes. Common errors made by the pioneer are as follows:
■ Marketing mistakes. Often the pioneer cannot judge which target market segments
will be most attracted to the new product. The challenger can take advantage of
the pioneer’s positioning misjudgements.
■ Product mistakes. The pioneer’s initial product is often discovered to have techni-
cal flaws and limitations. The challenger can identify these weaknesses and
overcome them.
■ First-generation technology. In markets characterised by rapid technological change,
the challenger can enter with superior second-generation technology which
leapfrogs the pioneer’s advances.
■ Resource limitations. Often the pioneer is a smaller company with limited financial
resources and marketing expertise. Large, sophisticated companies entering later
can swamp the pioneer’s efforts by blanket promotion of their products.
At the early stage of the market, the two most effective strategies for the challenger
are to seek new market segments or to seek new attributes.
New market segments

Markets grow mainly through the addition of new, discrete customer segments.
Generally, only a small proportion of the market will have been penetrated in the
early stages by the pioneer, so that focusing on non-users and new segments is a
better strategy than seeking to get the pioneer’s customers to switch. If the pioneer is
still serving the specialist, innovative segment, then there is a window available to
exploit the new, broader market segments. Generally this will require modified prod-
ucts, lower prices and different distribution channels.
Initially, the 35 mm camera market was dominated by the industry pioneers –
Germany’s Rollei and Leica. The Japanese firm Canon observed that only photogra-
phy specialists used these cameras; the rest of the market used cheap, low-quality
alternatives from Kodak and others. Canon’s strategy was to ignore the small special-
ist segment and tailor a simpler, lower-priced 35 mm camera for the mass of amateur,
occasional photographers. Canon faced no competition. Within a couple of years it
was outselling Rollei and Leica combined. Later, with its continually improving tech-
nical skills and marketing capabilities, it was able to take over leadership even in the
professional segments and beat Kodak in the emerging digital camera market.
In a rapidly growing market, the challenger should ask not only who is buying the
product today, but also who might buy it tomorrow (Figure 5.7). By identifying the
emerging market segments, the challenger can then become the pioneer. Even a late
entrant can be the pioneer of an emerging mass market if the early entrants have not
developed the new segments with the appropriate products and distribution channels.
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et
ark
Sales
m
rall
Ove
Market segments
Pioneer Challenger Late entrant
Time
Typical marketing mix:
Product Specialist New attributes Simpler
Price High Lower Low
Figure 5.7 Promotion Focus Selective Broad
Challenging for Distribution Direct Distributors Mass
markets
New attributes
A second strategy for the challenger is to provide new attributes beyond those offered
by the pioneer or market leader. A phenomenon of an evolving market is the accre-
tion of attributes desired by customers. Initially the innovator creates a market by
offering the benefit that meets a latent need. This initial benefit can be called a
core or primary attribute. For example, the first commercial computer provided a
breakthrough in information-processing power. Pfizer’s invention of Viagra has had a
significant impact on the lives of many men with erectile dysfunction (ED), new
competitors have already emerged and are offering the same primary benefit and it
no longer appears as a discriminator. Customers take it as a given for any supplier. If
new attributes do not appear, the product will becomes a commodity.
In practice, successful challengers develop additional attributes to augment the primary
one. Computer manufacturers increase the power, reduce the size, make them more user-
friendly and add services. Pharmaceutical companies develop drugs for ED that are safer,
longer lasting or faster acting. As each attribute gets matched by competitors, it ceases to
be a discriminator. Customers’ expectations are progressive – they continue to expect
more. Thus the challenger can break into the market by innovating with a new attribute.
If a company seeks to mount a leadership challenge at a mature stage of the market,
the strategic focus is different. Here the primary goal will be to attract customers from
the leader, rather than to penetrate non-users. Again military analogies are being
found useful. Kotler and Singh distinguished five attack strategies available for the
challenger (Figure 5.8).13
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(5) Bypass attack
(2) Flanking attack
(4)
Guerrilla
attack
Attacker (1) Frontal attack

Defender
(3) Encirclement attack
Source: Philip Kotler and Ravi Singh, ‘Marketing warfare in the 1980s’, Journal of Business Strategy, Winter 1981,
Figure 5.8 p. 38
Attack strategies
Frontal attack
This is a head-on attack on the market leader. It means seeking to beat the leader by
offering customers superior products or lower prices, or outspending it in advertising
and promotion. This strategy normally fails because the leader is likely to have lower
costs and better distribution, and is consequently in a good position to retaliate
strongly. The military historian Liddell-Hart, after analysing all the major battles
from the Greek wars to the present day, concluded that only six of the 280 victories
were the result of a frontal attack. The military view is that, for a frontal attack to suc-
ceed against a well-entrenched opponent, the attacker must deploy at least a 3:1
advantage in combat fire power. Frontal attacks make sense only if the leader has
become seriously debilitated.
Flank attack
A flank attack differs from a frontal one in that it attacks where the leader is weak
rather than where it is strong. While they are most common in the rapid growth
phase, even in the mature stage two opportunities frequently occur that create the
conditions for a successful flank attack. One is the emergence of new markets (e.g.
overseas countries) or market segments not yet served by the leader. The second is the
identification of new needs or attributes that are not effectively met by the market
leader (e.g. low-calorie beer).
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Encirclement attack
While a flank attack focuses on a specific target, an encirclement strategy launches an
offensive on several fronts simultaneously. The challenger brings out a variety of
offerings aimed at smaller or underdeveloped segments of the market. The attack
does not challenge the leader’s heartland, but focuses on specialised areas that it is
not covering effectively.
Guerrilla attack
Smaller companies might not be able to finance any of the above strategies. An alter-
native is guerrilla attacks to surprise and wrong-foot the leader, with the objective of
eventually seeking a stronger foothold in the market. Low-cost guerrilla attacks might
include publicity stunts, special promotions and targeted efforts in a single geo-
graphic area.
Bypass attack
Rather than fight the leader, the bypass or leapfrog strategy aims to attack where the
leader is unrepresented. This might mean choosing a country where the leader does
not have an operation. Alternatively, it may mean developing a rival technological
solution for the market.
Niche companies
A niche company focuses on a single, narrow market segment. While larger compa-
nies pursue multiple-niche strategies, a niche company pursues a single niche.
Surviving as a niche company is considerably more difficult than surviving as a com-
pany pursuing a broad, multiple-niche strategy.
A niche company strategy is more viable in the early and growth stages of the
market. As the market approaches maturity, it becomes much more difficult. At the
outset a pioneer can aim either to be the market leader or to become a smaller niche
player. The niche objective may be attractive to management for several reasons.
First, pioneers often have limited resources to invest in capacity expansion and pro-
motion. Focusing then on a specific segment of the market may appear the only
viable alternative. Second, competition from the incumbents may be potentially so
powerful that market leadership may appear unattainable. Third, the business may
have special skills or competences that fit well with one segment of the market, but
poorly with the mass market. For example, Hewlett-Packard possessed strongly based
capabilities in the scientific and business market, but had little experience of con-
sumer markets. This background dissuaded it from pushing first its electronic
calculators then its personal computers into the growing mass market. Finally, many
companies become niche players by default. They lack the foresight or skills to be
credible as multiple niches.
A successful niche strategy is based upon offering superior value to customers in one
segment of the market. Superior value can be based on either of two distinct strate-
gies. First, the nicher can offer superior perceived ‘quality’ to customers in the target
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Niche companies
segment. This may arise from products with superior performance (e.g. iMac), service
(e.g. First Direct), personnel (e.g. Claridges) or image (e.g. Rolex). Superior quality is
achieved when a nicher knows the requirements of customers in the niche better
than its broadly based competitors, and has the skill to tailor its resources to meeting
precisely the unique needs of this group. The second strategic option is to offer lower-
priced solutions to the target niche. Many local companies pursue this strategy in
their specific geographical areas. The local builder, accountant or repair shop will
often undercut its bigger national rivals. Such companies often have lower overheads
and higher labour productivity than their more bureaucratic competitors.
For a niche strategy to be viable there are several testing requirements:
■ A separable niche. The requirement of a distinct customer group with needs that
differ from others is normally the easiest one. For example, people who buy luxury
sports cars do not see a family saloon as a good substitute. A coatings company
purchasing speciality chemicals will have different requirements from the run-of-
the-mill blender.
■ A separate cost structure. More difficult is the requirement that the nicher is not
penalised by a higher cost structure from operating in only a fraction of the
market. Often the bigger companies have leverage in R & D, buying and scale
economies that allow them to undercut the nichers in the specialised segment.
■ Lack of strategic interest. A small company has to hope that its niche is not of
strategic interest to the major players. If giants such as Toyota or Unilever do
decide that it is strategically important to capture share in the niche then they
are likely to have the resources and capabilities to make it very tough for the
smaller players.
■ Lack of potential. The major players are likely to be uninterested in a segment only if
it is too small to be worth investment. For example, Manganeze Bronze has a
monopoly on the London black taxi market. The specialist requirements in London
(especially the regulatory turning circle and wheelchair access requirements)
essentially prevent standard cars from being used as taxis. Because the annual
volume is so small, it is not worthwhile for a major competitor to make the invest-
ment to produce a rival taxi. However, when the regulations are relaxed, the niche
is likely to attract competition.
■ Cyclical stability. A niche player has all its eggs in one basket. It is tough for niche
players to survive for long in a market characterised by sharp cyclical swings. In a
recession they have no other market to provide offsetting gains.
As the market develops towards maturity, the likelihood of these conditions being
fulfilled diminishes. First, during the growth stage of the market it is common for the
market to be characterised by distinct strategic groups of competitors, each focusing
on a single broad segment. For example, in the early days of the computer market,
IBM dominated the mainframe, DEC led in minis and Apple led in PCs. In the 1960s,
Ford and General Motors led in the mass car market, the Japanese were penetrating
the low end, and specialists such as Mercedes, BMW and Jaguar led the top end. As
the market develops, certain segments mature, encouraging competitors in these
areas to invade adjacent segments. For example, IBM invaded both the PC and the
mini-computer markets. Ford and GM acquired upmarket car marques.
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Second, competitors that successfully penetrate the low-price end of the market even-
tually seek to move into higher value-added segments. For the last 25 years, the
Japanese have moved ‘upmarket’ in cars, cameras, chemicals and many other areas. A
third reason why large companies develop multiple niche strategies is progress in
management. Executives are learning how to restructure into networks of small busi-
nesses, each of which can be targeted as a niche. Each SBU has a separate marketing
strategy and organisation, but they have synergies in shared R & D, distribution and
other scarce capabilities. For example, the giant engineering group ABB has 1,300 sep-
arate companies and 5,000 SBUs, each targeting specific niches but sharing certain
key skills, resources and experience.
Over time niche strategies tend to become less viable. Famous niche companies such
as Aston Martin, Ferrari, Financial Times, Perrier, Gucci and Mont Blanc are now all
part of large multiple-niche companies. Single-niche companies can have a long life.
But their lifespan depends upon the strategic interest that their competitors have in
the niche, and the strength of the barriers to entry that can be created.
Summary
Managers have to understand that markets are highly dynamic. Today, customer
requirements, competitive activity and technological solutions are impermanent and in
constant flux. The product life cycle is too simple a model for predicting the nature of
these changes. Instead management have to assess the six underlying evolutionary
forces that shape the behaviour of markets.
Successful competitive strategies are based on anticipating these evolutionary forces and
using them to advantage. Most pioneers need to appreciate that their advantage is
shortlived and that the strategic window they create must be rapidly and decisively exploited
and then vigilantly defended. Newcomers find the odds stacked against them when they
attack an effective market leader. A successful leader is rarely overtaken by a head-on
strategy. Instead success usually depends upon further innovation in identifying new market
segments and additional attributes not yet identified or exploited by the leader.
Market evolution is characterised by competitors crossing into each other’s strongholds.
Competition increases both in intensity and scope. This makes it difficult for companies
pursuing single-niche strategies. Over time, high-value niches become attractive to larger
companies searching for new avenues of growth.
Questions
1 Give some examples of products that appear to have followed a product life cycle. Find
some examples of products that have not. What are the underlying explanations of these
differences?
2 An electronics company invents a major new home entertainment product. Discuss how
the market is likely to change over the next five years. What implications do these changes
have for the company’s marketing strategy?
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Notes
3 The cigarette market in western Europe appears to be slowly declining. What strategies
would you recommend for a leading cigarette producer?
4 A small pharmaceutical company pioneers a major new heart drug. What strategic
considerations should govern its approach to proceeding with the innovation?
5 Alpha Company dominates the market for the portable fire extinguishers maintained in
hotels, offices and other public buildings. How could Beta Company, with half the sales of
Alpha, challenge for market dominance?
6 Gamma holds a niche position making high-quality motors for garden mowers. Many major
players such as Honda and Yamaha also operate in this sector. Discuss the problems likely
to face Gamma in maintaining its niche position.
Notes
1. See, for example, P. Kotler, Marketing Management, 10th edn (Englewood Cliffs, NJ: Prentice
Hall, 2000), p. 303.
2. See, for example, Theodore Levitt, ‘Exploit the product life cycle’, Harvard Business Review,
November 1965, pp. 81–94; Robert D. Buzzell, ‘Competitive behaviour and product life
cycles’, in John Wright and J. L. Goldstucker (eds), New Ideas for Successful Marketing
(Chicago, IL: American Marketing Association, 1966), pp. 46–68.
3. P. H. Golder and G. J. Tellis, ‘Growing, growing gone: cascades, diffusion, and turning
points in the product life cycle’, Marketing Science, Spring 2004, pp. 207–18.
4. John Hogan, Katerine N. Lemon and Barak Libai, ‘What is the true value of a lost
customer?’, Journal of Services Research, February 2003, pp. 196–208.
5. T. Higuchi and M. D. Troutt, ‘Dynamic simulation of the supply chain for a short life cycle
product – lessons from the Tamagotchi case’, Computers and Operations Research, June 2004,
pp. 1097–114.
6. Michael E. Porter, Competitive Strategy (New York: Free Press, 1980), pp. 27–8.
7. Ibid., pp. 267–73.
9. Peter N. Golder and Gerard J. Tellis, ‘Pioneer advantage: marketing logic or marketing
legend’, Journal of Marketing Research, May 1993, pp. 158–70; Roger A. Kerin, P. Rajan
Varadarajan and Robert A. Peterson, ‘First mover advantage: a synthesis, conceptual
framework and research propositions’, Journal of Marketing, October 1992, pp. 33–52.
10. Carl von Clausewitz, On War (London: Routledge, 1908); B. H. Liddell-Hart, Strategy (New
York: Praeger, 1967). For applications to marketing, see Philip Kotler and Ravi Singh Achrol,
‘Marketing warfare in the 1980s’, Journal of Business Strategy, Winter 1981, pp. 30–41; Al Ries
and Jack Trout, Marketing Warfare (New York: McGraw-Hill, 1986).
11. The following draws heavily on Kotler and Singh, op. cit.
12. See Buzzell and Gale, op. cit., pp. 8–15.
13. Kotler and Singh Achrol, op. cit.
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‘What’s in a name? That which

we call a rose by any other name
would smell as sweet.’
William Shakespeare
Chapter 6 BUILDING SUCCESSFUL BRANDS
Brands are at the heart of marketing and business strategy. Marketing is about decom-
moditising the company’s offer. If a company’s offer is perceived to be the same as those
of competitors, then consumers will be indifferent and will choose the cheapest or most
accessible. Companies that are forced to compete on price rarely make satisfactory profits.
The purpose of marketing is to create a preference for the company’s brand. If customers
perceive one brand as superior, they will prefer it and pay more for it. Brand equity is the
value of these additional cash flows generated for a product because of its brand identity.
Developing brand equity is a central issue for top management because it is a key deter-
minant of corporate value. The average British and American company is valued by the
stock market at around twice net balance sheet assets. However, companies with portfo-
lios of strong brands are valued by the stock market at four times net assets.1 Huge
sums are now paid for brands. In January 2005 Procter & Gamble paid $57 billion, a
premium of nearly 20 per cent to acquire Gillette and its brands. In the same year Allied
Domecq announced that they had received a takeover approach from Pernod-Ricard. The
net assets of the business were stated by the company to be €100 million in 2004 and
the board recommended an offer worth €12 billion – over ten times the net book value
of the assets. Most of this premium was due to the value of the Allied Domecq brands
such as Ballantine’s whisky, Beefeeter gin, Sauza tequila, Courvoisier cognac and
Stolichnya vodka. Before the bid the company and its brands was valued by the market
at around €10 billion, but in order to tempt shareholders to sell a premium of around
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Chapter 6 Building successful brands
30 per cent was required. Brand identities can be rented or licensed. Sunkist, for exam-
ple, receives €16 million per year in royalties for allowing such companies as
Cadbury-Schweppes, General Mills, Lipton and Novartis to use its brand name.
Successful brands create wealth by attracting and retaining customers. When a company
creates this type of customer preference and loyalty, it can build a strong market share,
maintain good price levels and generate strong cash flows. This in turn drives up the
share price and provides the basis for future growth. Brands are not just a feature of con-
sumer markets; they are equally central in industrial markets, for services and retailers,
and for organisations marketing a collection of skills.
The following sections begin with an analysis of brands from a marketing viewpoint: the
characteristics of strong brands, how they are built and how they are reinforced. It is
then shown how, by adding values for customers, successful brands create financial
assets that generate sustainable cash flows for shareholders. The most common types of
problem that managers face with brands are then explored. When should a firm try to
extend a successful brand to a different market area? How can brands be revitalised and
repositioned? What is the future of global brands? Under what circumstances does it pay
to acquire brands or companies with strong brands? Finally, a key dilemma in branding is
discussed – the conflict between long-term investment in building and reinforcing brands
and the need to maintain short-term profit performance.
Products and brands
To understand the role of brands it is necessary to distinguish three concepts: a prod-

uct, a brand and a successful brand. A product is anything that meets the functional
needs of customers. This can be a physical product, such as a specific chemical com-
pound, an industrial lathe or a watch. Alternatively, it can be a service product, such
as a bank, courier or management consultancy service. At the most basic level, cus-
tomers buy products to meet certain functional needs: a watch is bought to tell the
time, a bank is used to save, transfer or borrow money.
Most suppliers will want to identify their own product and differentiate it from com-
petitors’ products. They do this by branding it. A brand can be defined as a specific
name, symbol or design – or, more usually, some combination of these – that is used
to distinguish a particular seller’s product. A supplier will then normally try to create
awareness and preference among customers for its brand. Awareness can be created
by developing a striking presentation of the brand and spending sufficiently on
advertising and promoting it. Creating brand preference, however, is more difficult.
Many suppliers achieve high awareness, but are disliked by large sections of the
market. These are negative brands – the brand name is a liability rather than an asset.
In the past Woolworth, Rover, the Midland Bank and Skoda are examples of compa-
nies that achieved this dubious distinction. Woolworth is the only survivor in its
original form, Rover has experienced a sorry decline, Midland Bank was rebranded as
HSBC and Skoda was acquired by Volkswagen and subjected to many years of
investment in technology and quality to turn the brand around.
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Products and brands
The specific characteristic of a successful brand is that, in addition to having a product

which meets the functional requirements of consumers, it has added values which
meet certain of their psychological needs. These added values are elicited feelings of
confidence that the brand is of higher quality or more desirable than similar products
from competitors. Table 6.1 shows the world’s leading brands, their estimated values,
and the percentage they represented of the company’s market capitalisation.
Table 6.1 The world’s most powerful brands 2004

Brand value % of company Brand value % of company
$ billion market value $ billion market value
1 Coca-Cola US 67 66 11 Mercedes Ger 21 53

2 Microsoft US 61 23 12 Hewlett-Packard US 21 36
3 IBM US 54 44 13 Citibank US 20 8
4 GE US 44 12 14 Amex US 18 28
5 Intel US 33 23 16 Gillette US 17 35
6 Disney US 27 51 16 Cisco US 16 15
7 McDonald’s US 25 68 17 BMW Ger 16 53
8 Nokia Fin 24 34 18 Honda Jap 15 33
9 Toyota Jap 23 19 19 Ford US 15 88
10 Marlboro US 22 16 20 Sony Jap 13 36
Adapted from www.Interbrand.com
Interbrand has been collating this information for a number of years and Table 6.2
compares the brand values of the five brands in 2004 with their values computed by
Interbrand in 1999.
Table 6.2
Brand value 2004 Brand value 1999 % change
Change in brand
values since 1999 Coca-Cola 67 84 –20
Microsoft 61 57 +7
Disney 27 32 –16
McDonald’s 25 27 –7
Ford 17 110 –85
The table illustrates that increasing brand values is becoming harder and even a dom-
inant brand in its category like Coca-Cola is struggling. It is perhaps no surprise that
the company which has the least competition is showing growth in its brand value.
The declines can be attributed to increased competition (Ford suffering from contin-
ued challenges from Japanese and premium European manufacturers). Changing
consumer tastes (Coca-Cola and McDonald’s failing to adequately anticipate trends
towards more healthy food and drink consumption, Disney failing to anticipate the
competition from computer games which lessen the attraction and novelty of its
theme parks to its traditional customers).
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A successful brand (S) can be seen as a combination of an effective product (P), a

distinctive identity (D) and added values (AV).
S = P × D × AV
Successful brands guarantee the satisfaction of a specific want through products with
unique combinations of attributes; they promise specific consumer satisfaction.
Volkswagen promises the specific consumer satisfaction of reliability and it is this prom-
ise which allows VW to charge a premium over the identical car under the Seat brand.
Product effectiveness can normally be measured in blind product-use tests against
competitors. Distinctive identity is measured by prompted and unprompted brand
awareness. Added values can be measured by perceptual research and brand prefer-
ences. The three characteristics of a successful brand are multiplicative rather than
additive – each is essential. Without a good product it is impossible to create a suc-
cessful brand. Similarly, unless differentiation and awareness can be developed, a
good product will not leave the supplier’s premises.
Companies can choose to focus their brand building at various levels:
■ Company brand. Companies such as Philips, Cadbury and Virgin choose to make the
company name the dominant brand identity across all or most of their products.
■ Individual brand names. At the opposite extreme, companies such as Unilever and
Procter & Gamble have focused on individual brand identities for each of their
products (Persil, Surf, Cif, Domestos, Fairy, Comfort, Ariel, etc.) and avoid featur-
ing the company name.
■ Company and individual brand. Companies such as Kellogg’s (Kellogg’s Cornflakes,
Kellogg’s Raisin Bran, etc.) choose a middle way, featuring both company and indi-
vidual brand names.
■ Range branding. Some companies group families of products under separate range
names. For example, Matsushita markets its electronic products under four brand
families: National, Panasonic, Technics and Quasar.
Company brand names have the advantages of economies of scale in marketing

investments and greater recognition, and they can often facilitate the introduction of
new products. On the other hand, individual brand names permit finer segmentation
of markets, limit cannibalisation between the company’s brands and reduce the risk
of individual brand failures harming the company’s overall reputation. Range brand-
ing and mixed strategies seek a balance between these two extremes.
The trend today is clearly away from companies launching new free-standing brands
in the way Unilever and Procter & Gamble did in the past: the marketing costs are
simply too great and the risks too high. Instead they are focusing on promoting the
company as the umbrella brand or concentrating on a handful of strong ‘pillar’ brand
names and using these as range brands or the core for line and brand extensions.
Added values
Added values – the subjective beliefs of customers – are at the heart of building suc-
cessful brands. That such beliefs exist has been demonstrated on countless occasions.
In tests where customers are presented with competitive products in an unbranded
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Added values
form, there is often no clear preference. But if a top brand name such as Coca-Cola,
the Financial Times, Sony or Cadbury is attached, a dramatic switch in preferences
invariably occurs (see Box 6.1). Not only will people prefer the strong brand name,
but they will actually be willing to pay a higher price for it.
Nor is the emotional impact of the brand limited to consumer goods. A classic study
by Professor T. Levitt at the Harvard Business School clearly demonstrated that brand
image has a significant effect on industrial buying decisions.2 He found that the more
powerful the brand name, the greater the chance of the industrial buyer giving the
company a hearing for a new product, and the greater the likelihood of its early
adoption. Further, the study showed that the stronger the technical background of
the purchasing manager, the greater the influence of the brand.
Branding appears particularly important in high-tech industrial markets. The ‘Intel
Inside’ advertising campaign made a significant contribution to Intel’s growth, the
price premiums it achieved from computer manufactures for its processors, and the
positive associations held both by its customers and end consumers. Many other
high-tech companies, such as Oracle, Cisco, IBM and Microsoft followed Intel’s
demonstration of the effectiveness of brand building in business-to-business markets
by boosting their own advertising budgets.
Sources of brand values

That most buying decisions are influenced by brand values which are additional to
those based upon real performance differences cannot be in doubt. There are two
reasons why this occurs. First, the task of choosing competing products on technical
or rational grounds is too difficult, time consuming and expensive for most buyers.
The sheer volume of decisions to be made every day, the pace of technical change,
the number of competing alternatives and the bewildering variety of advertising
and selling messages mean that buyers look for safe short cuts. Reputable brand
names provide confidence and allow customers to cut through the risks and
complexity of choice.
Box 6.1 What’s in a brand name?

Coke and Pepsi. A panel of consumers was asked to taste Coke and Pepsi. In blind tests (i.e. where the
brand identity was concealed), 51 per cent preferred Pepsi and 44 per cent Coke. In open test (where
brand identities were shown), preferences were completely reversed: 65 per cent preferred Coke and only
23 per cent Pepsi. Such tests often provide striking illuminations of the power of brand names.
Peugeot, Citroen and Fiat share the production for their People Carriers. The cars come off the same
production line in France, with the only visible difference being the badging of the cars, they cost the same.
Yet they command different prices, with the Peugeot version being as much as 5 per cent more than the
Fiat at manufacturer prices and with a considerably greater differential when actual consumer prices paid
are considered. The power of the brand is often more important than the differences in manufacturing cost
or quality.
Sources: Coke and Pepsi: Leslie de Chernatony and Malcolm H. B. McDonald, Creating Brands (London: Heinemann, 1992); Peugeot,
Citroen and Fiat: authors
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The second reason that added values occur is that brands are bought for emotional
reasons as well as function. A Mercedes car is bought to make a personal statement as
well as for a means of transport. Similarly, most watches tell the time with high relia-
bility, so that functionality has little relevance to the choice process. People use
brands to show off their lifestyles, interests, values or wealth. Customers choose
brands that they perceive as meeting their ‘needs’. But in today’s affluent society,
these needs, to borrow from Maslow’s theory of motivation, are as likely to be about
self-actualisation or esteem, or to gain a sense of belonging, as they are to be basic
physical or economic needs.
How added values occur

How is it that some brands have strong images while others do not? Brand values
derive from five main sources:3
■ Experience of use. If a brand provides good service over many years of regular use,
it acquires added values of familiarity and proven reliability. By contrast, a brand
that is often unsatisfactory in use or where, through lack of reminders, the cus-
tomer slips out of a regular usage pattern will fail to acquire these positive
associations. The British motorcycle and car industries suffered declining brand
images during the 1970s and 1980s as a result of their lack of reliability compared
to their German and Japanese competitors.
■ User associations. Brands frequently acquire an image from the type of people who
are seen as using them. Advertising and sponsorship are often used to convey images
of prestige or success by associating the brand with glamorous personalities. In con-
sumer tests, buyers will describe with great facility the types of people whom they
perceive as drinking Guinness, driving Volvos or buying Rolex watches.
■ Belief in efficacy. In many cases, if customers have faith that a brand will work, it is
more likely to work effectively for them. For pharmaceuticals, cosmetics and even
complex high-tech products, faith in a brand generates satisfaction in use. Beliefs
in efficacy can be created by comparative evaluations and rankings from consumer
associations, industry endorsements and newspaper editorials.
■ Brand appearance. The design of the brand can clearly affect preference by offering
cues to quality. Levitt describes an experiment with expensive laboratory technol-
ogy.4 Two designs of the same product were developed, one by engineers, the other
by professional designers. When the two models were shown to a sample of labo-
ratory directors – all with PhDs in electronics – the professional design was
overwhelmingly chosen.
■ Manufacturers’ name and reputation. In many situations a strong company name
(e.g. Sony, Kellogg’s, Hewlett-Packard) attached to a new product will transfer posi-
tive associations, so providing confidence and incentive to trial.
Measuring and planning added values

There are a variety of research methods for helping managers understand how
consumers perceive brands. For industrial goods and services this is often straightfor-
ward, but for consumer goods, indirect or projective interviewing techniques are
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Added values
sometimes more useful. Consumers are often unwilling or unable to explain the
inner feelings and motivations that drive their brand choices, so researchers approach
these issues obliquely.5 The most common projective techniques are as follows:
■ Free association. Customers are asked to provide spontaneously the words that come
to mind when a brand, brand name or slogan is presented to them. This is followed
by a discussion that seeks to discover why the brand creates these associations.
■ Picture impressions. Customers interpret scenes in which the brand plays a role. In
one example, a man is shown reading a specific mail order catalogue, and his wife,
standing nearby, is making a remark. The respondent is asked to imagine what the
wife is saying about the catalogue. This technique recognises that, while con-
sumers are often constrained in talking about their own feelings, there are no such
inhibitions in projecting these feelings on to others.
■ If the brand were a person. Respondents are asked to think of the brand as a person
and describe its personality. The result is often a revealing picture of the brand’s
perceived personality and associations.
■ Animals, activities and objects. Customers are asked to relate brands to types of
animal, car or tree. Again the particular association reveals how brands are thought
of by customers.
■ What is the brand user like? Respondents describe typical users of various brands.
The aim is to reveal hidden needs and motivations behind brand choices.
■ Brand similarities and differences. To identify choice dimensions, respondents are
asked to identify how brands differ. A related approach is to ask consumers to rank
pairs of brands according to similarity. Then, using computer-based scaling tech-
niques, a map of a market can be derived.
Building on such measures of consumer perceptions, the manager will seek to formu-
late a brand positioning strategy – a plan of what image the brand should cultivate.
For example, should it be seen as ‘prestigious’ (e.g. Rolls-Royce), ‘value for money’
(e.g. Toyota), ‘environmentally friendly’ (e.g. Body Shop) or ‘high-tech’ (e.g. Hewlett-
Packard)? In developing the positioning concept, the manager will have two criteria
in mind. First, it should be unique: to differentiate the brand clearly from other
competitors in the market – otherwise, why should customers select it? Second, the
unique advantage must be considered relevant and desirable by the target market
segment. Developing a positioning strategy involves four steps:
1 Attribute research – qualitative research of the type described above, into what
attributes buyers use in considering alternative brands.
2 Competitor research – identifying how competitive brands are perceived along
these attributes.
3 Gap analysis – exploring whether there are any need ‘gaps’: attractive positions
that would allow the company to offer desirable added values superior to or not
offered by competitors.
4 Concept testing – evaluating whether any resulting positioning concepts offer added
values that are understood, believed and of perceived value to target customers.
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Brand analysis
Brands compete because they are similar and yet evidence shows that consumers
have preferences for strong brands (Coke versus Pepsi). The key is to ensure that the
brand is differentiated in ways that are relevant to the consumer and which encom-
pass both the rational and emotional aspects of the brand. There are a number of
models available to help in this process. For example, Kapfferer introduced the con-
cept of the brand pyramid.6 A simple but useful approach is shown in Figure 6.1.
There are five building blocks which are divided into the rational and emotional
components. Brand analysis starts at the bottom block and describes the identifiable
product attributes which are specific to the brand under analysis. The next level up
lists the brand’s functional benefits: the rational expectations which result from using
that particular brand. At the next level we start to examine the emotional elements
by looking at the rewards which users should expect from the brand. Next the values
of the brand’s users are described as aspects which they care about most. The final
building block aims to describe the personality of the brand expressed in human
terms. Above the building blocks sits the brand essence, which represents the single
idea that fuses together the emotional and rational features comprising the brand.
The brand essence should remain fixed and any changes to the brand as it evolves
should be consistent. In the banking sector Abbey developed a brand essence of ‘Fair
Partnerships for Life’. Shortly afterwards the operational pressure to improve per-
formance led to the introduction of an €8 charge for customers who wanted to pay
bills in their branch. This move attracted much criticism and more importantly
undermined the Abbey brand essence.
Figure 6.2 shows the building blocks used to analyse two contrasting financial serv-
ices brands. Northern Rock was founded in the mid-nineteenth century and has a
long heritage which it has maintained. While it retains a branch network concen-
trated in the north east of England, many of its 61 branches are spread throughout
The enduring ‘soul’ of the brand. The single

Essence idea that fuses the key emotional and
functional roles of the brand
The image of the brand, expressed

Personality
in human characteristics
What the users of the brand care

Values of users
about most
Emotional benefits expected from

Emotional rewards
using the brand
Functional benefits Rational expectations as a result of using the brand
Attributes Rational product features

Figure 6.1
The brand building
blocks
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Added values
Northern Rock
As solid as a rock – a Northern Rock
Essence
Personality A solid dependable whippet!
Honest, straight talking and

Values of users
straightforward
Won’t let you down, does what it says

Emotional rewards
on the packaging
Functional benefits Value-for-money mortgages
Attributes Northern, specialist mortgage provider, black and pink
First Direct
Sorted
Essence
Personality Grown-up maverick
Values of users Intelligent, quirky, empathetic, confident
Feel valued, feel better-off, having a rapport,

Emotional rewards
being part of the First Direct community
Functional benefits Transparent, 24/7 multi-channel
Figure 6.2
Innovative, efficient, most satisfied customers,
First Direct and Attributes
most recommended
Northern Rock
brands
the country and it also uses the Internet as a sales and marketing channel. While it
offers other financial services such as savings accounts, credit cards, personal loans
and household insurance, its core product remains domestic mortgages. Measuring
new business as a proportion of total outstanding lending, Northern Rock was the
fastest growing of the top 10 UK mortgage lenders in 2003.7 The Northern Rock
brand is consistent with the core business, and not easily transferable to another
organisation which might be interested in acquiring the business.
First Direct was set up by its parent Midland Bank (now rebranded to HSBC) in 1989
as a separate telephone banking operation. Ten years later it launched its Internet
platform and now has over 1.2 million customers. It has positioned itself as being
different to other banks (see Box 6.2).
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Box 6.2 The First Direct Position

‘The real difference about First Direct is simple. Most banks are about money. First Direct is about people. Simple but
revolutionary.
We believe banking should fit around you, not us. It’s your money. You come first. The way we respond to you is what
matters. That’s why our people have personality and attitude. We are keen to learn.
Quick and efficient, yes, but with a touch of what we call “magical rapport”. Wit, intelligence, common sense. It’s
what separates us from the others, why we’re the most recommended bank with the most satisfied customers.
Respect for the individual is our philosophy. It’s how we treat each other and how we treat you.’
The bank is a regular winner of awards for customer satisfaction, service excellence and product
performance and has developed the brand using these elements in both the functional and emotional
building blocks. Despite the proliferation of non-branch-based banks and the fact that customers can find
better savings rates and cheaper sources of finance, First Direct remains the leader in its field because of
the power of the brand it has developed.
How to build brands
A successful brand is one that customers perceive as offering superior value. A brand
image can be thought of as being built up in four layers – a quality product, a basic
brand that differentiates the product, and then augmented and potential layers of
branding which enhance its values.8
A quality product
Since satisfactory experience in use is the major way in which brand values are
acquired, having a quality product is the foundation upon which all other brand
associations are built. New products are unlikely to succeed unless they score better
than existing competitors in blind product-use tests. Since it takes time to build
values of trust and confidence, existing brands in the market always have an advan-
tage unless the new product offers demonstrably superior performance. Of course, if
existing brands are not updated as superior technology and features become avail-
able, they will become obsolete.
However, having a superior product or service is only the starting point. Today, com-
petitors quickly copy innovations, making functional advantages short-lived. For
example, in the early 1980s the world’s most profitable pharmaceutical product was a
unique anti-ulcer drug from SmithKline, which generated €1.6 billion annually in net
cash flow. Then its patent expired, generic versions of the drug were rapidly intro-
duced by competitors, and profits quickly drained out of the product, forcing
SmithKline into a merger with Beechams a few years later. Products cannot generate
high sustainable profits unless the company can build barriers to competitive entry.
In some markets, patents can keep competitors out for an extended period. In others,
government regulations, monopoly of the resource base, control over distribution or
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How to build brands
scale economies can stop competition from eroding market share and profits. But
these are exceptional restrictions. The most common barrier to competition is to
build a brand that has values beyond those of functionality.
The basic brand

The ‘basics’ of the brand are the core elements upon which first differentiation and
then the brand personality are built. They are the essential marketing mix elements:
product features such as choice of brand name, design, packaging, logo and colour;
price points; communications, including advertising, selling and sales promotion;
and channel decisions such as type of outlet and mode of distribution. The brand ele-
ments should be tested against three criteria:
■ Do they support product performance? (For example, does the pack keep the con-
tents fresh? Is it easy to open? Is the distribution channel capable of efficient
delivery and servicing?)
■ Do they differentiate the brand, facilitating brand awareness and recall? (For exam-
ple, is the brand name easy to remember? Is the advertising effective?)
■ Do they contribute to the brand’s positioning strategy? (For example, are the name,
design and advertising consistent with the image the brand seeks to convey?)
Brand features often signal desirable attributes to customers. With cars, a solid
door closure sound implies good workmanship and a solid, safe body. In home
entertainment, large screens imply better vision. With detergents, suds indicate an
effective cleaner.
The augmented brand

The basic brand delivers the core product to customers in an attractive way. But suc-
cessful companies seek the competitive edge by enlarging the core product with
supplementary products and services that enhance the customer’s total purchasing
and use experience. The company searches for ways to meet expectations beyond
that required or even expected by the buyer. It is at this augmented level of added
values that much of today’s competition occurs. For example, when a customer buys
a PC from Dell, also provided is a toll-free hotline number to answer any problems in
using the product on a day-to-day basis. When the customer phones, the Dell opera-
tor has online details of the enquirer’s machine, any special features and what its
service history has been. Besides offering a good product, Dell uses its ‘direct relation-
ship marketing’ to forge a close, direct relationship with its customers, and offers
them some of the best back-up services in the industry, all of which are designed to
build brand loyalty.
The most common methods of augmenting the brand are services, guarantees and
financial support. Services are particularly important. For example, an MBA pro-
gramme is a service product offered by many university business schools. The core
brand that most offer is an examined set of courses in professional management.
Since the basic products are all similar, the top schools seek to augment their brands
with extra services for their customers. These may include attractive hotel and
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restaurant facilities, social programmes for the student’s spouse, a crèche, leisure facil-
ities, foreign language tuition, overseas exchanges, career counselling, job placement
and networking associations. Prospective students choose the brand that they per-
ceive is most likely to offer the best total solution to their needs of a satisfying
educational and social experience, and a rewarding career afterwards.
Unconditional guarantees are becoming increasingly popular among the best compa-
nies. Xerox, Tesco and Federal Express, for example, offer customers the opportunity
to return the product and get their money back, whatever the reason. Such guaran-
tees are found to have a double benefit. First, they provide a competitive advantage
from the security offered to customers. Second, unconditional guarantees can be a
lever for a general upgrading of the quality of the supplier’s product and service stan-
dards. Potentially expensive guarantees highlight to employees very directly the cost
of poor quality and their responsibilities for satisfying customers. Paradoxically, run
properly to challenge personnel to achieve excellence in product and service delivery,
unconditional guarantees actually lower the supplier’s total costs.9
Financial support can be a powerful and direct means of building customer loyalty. The
supplier can offer distributors or end customers loans to finance their own business devel-
opment. These loans are repaid not in cash, but in long-term supply contracts. Such
arrangements are common in brewing, the oil industry, pharmaceuticals and the restau-
rant business. Besides tying the customer to long-term contracts, they facilitate the
introduction of higher-priced brands by enabling the customer to write off the debt faster.
These augmented brand features offer differential advantages to customers and they
have the additional advantage of being more difficult to copy. Some, such as finan-
cial support, are expensive for competitors to match. Others, such as service and
guarantees, depend upon the culture and commitment of the people in the organisa-
tion. Such assets and core capabilities are more difficult to build and emulate than
simple product features.
The potential brand

The final defensive ring to be built around the product is the potential brand
(Figure 6.3). A brand achieves its potential when its added values are so great that the
customers will not willingly accept substitutes even when the alternatives are substan-
tially cheaper or more readily available. Here the psychological benefits – confidence,
esteem, total satisfaction – make possible brand dominance, high profit margins and
long-term brand loyalty. By these means brands such as Coca-Cola, McKinsey, Kelloggs,
Mars, Gillette and Nestlé have maintained brand leadership for over 50 years.
The major characteristics of brands that achieve their potential can be summarised
as follows:
■ A quality product. Since satisfactory experience in use is the major determinant of

brand values, quality is the number one requirement. If quality is allowed to dete-
riorate or if the brand is surpassed by competitive products that work better, then
its position will be undermined.
■ Being first. Being first into the market does not necessarily bring success, but it
does make the task less tough. It is easier to stake a position in the consumer’s
mind when the brand has no competitors to rival its claims. ‘Being first’ means
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How to build brands
1 Tangible product
2 Basic brand
3 Augmented brand
4 Potential brand
Service
Brand
name
Pack
Delivery Credit
and Design and
installation terms
Features
Quality
Guarantees
Source: Adapted and reprinted by permission of Harvard Business Review from Theodore Levitt ‘Marketing success
Figure 6.3 through differentiation – of anything’, January–February 1980
What is a brand?
first into the key markets, not first with the technology. For example, Texas
Instruments brought out the first electronic watch, but Casio and Seiko were first
to bring it to a mass market. TI developed the technology, but it was the Japanese
who developed the first successful brands.
■ Unique positioning concept. If the brand is not the innovator, it must have a unique
positioning concept – a segmentation scheme, benefit proposition or augmented
brand – that will distinguish it from the field of competitors. Swatch did this with its
youthful fashion concept in the watch market; Body Shop with its ‘green’ positioning
in beauty care retailing; and Thermalite with its branding of basic building bricks.
■ Strong communications programme. A successful brand requires an effective selling,
advertising or promotional campaign that will communicate the brand’s function
and psychological values, trigger trial and reinforce commitment to it. Without
building awareness, comprehension and intention to buy, the brand will not leave
the manufacturer’s shelves.
■ Time and consistency. Brands are not built quickly. It often takes years to build up
the added values. Brands require investment, which has to be maintained over
their lives. First, cash is required to build brand adoption and use, then it is needed
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to maintain the brand’s values and relevance in the changing environment. There
are no short-term techniques for building sustainable brand equity, but the
rewards can be momentous. Mars introduced the Galaxy chocolate brand into the
UK market in 1960. It has taken the company 45 years of continuous brand build-
ing to reach the position where it generates a highly profitable €250 million per
year at retail sales value.
Figure 6.4 illustrates the principles of building successful brands. Management must
start with a quality product that meets the functional needs of customers. Next it
must wrap around the product an attractive presentation that will differentiate it and
enhance its appeal. Third, it should seek to augment its basic appeal with additional
products or services to delight customers. The brand-building process starts when the
customer tries the brand. If management has developed the brand properly, it should
then be satisfactory in use and lead to a willingness to repeat buy. To get trial and
repeat purchase, however, requires triggering mechanisms. This stimulus is provided
by the firm’s investment in advertising, selling, promotion, public relations, etc. The
firm needs to communicate the values of the brand and then reinforce brand associa-
tions to start the wheel of usage experience and keep it turning. Through the
combination of the stimulus of consistent communications and satisfactory usage
experience, brand awareness, confidence and brand equity are built.
The acid tests of whether a brand is successful are three:
■ Has it captured the leading share in its market segment or distribution channel?
■ Does it command prices sufficient to provide a high profit margin?
■ Will the brand sustain its strong share and profit position when competitive and
generic versions of the product hit the market?
Brand equity
Presentations
Loyalty Display
Advertising
Potential PR
Selling
Promotion
Product
Trial
Differentiation
Brand
Satisfied
Figure 6.4 Added
customers
Brand building values
over time
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The benefits of brands
Brands generate value for companies in four ways. First, strong brands usually obtain
price premiums from either consumers or resellers. Second, strong brands obtain
higher market shares. Third, because of customer loyalty, successful brands generate
more stable and less risky earning streams. Finally, successful brands offer avenues for
further growth.
Brands, market share and profits

A successful brand is one that customers want to buy and retailers want to stock – it
achieves a high market share. Typically, a brand leader obtains twice the market
share of the number two brand, and the number two brand obtains twice the share
of the number three. The brand with the highest market share is always much more
profitable. The well-known PIMS findings, based on detailed research into a sample
of 2,600 businesses, found that, on average, brands with a market share of 40 per
cent generate three times the return on investment of those with a market share of
only 10 per cent (Figure 6.5).10 Weak brands mean weak profits. For fast-moving
consumer goods (fmcg) the relationship is even stronger. Studies in the USA and UK
indicate that, on average, the leading brand operates on a typical return on sales of
18 per cent, the number two brand has a return of only 3 per cent, and the rest are
unprofitable.11
There are of course exceptions to these general prescriptions and in this context
Galaxy in the UK makes an interesting case. Despite long-term focused brand-
50
40
Return on investment (%)
30
20
10
Figure 6.5
The relationship 0
10 20 30 40 50 60
between market
share and Absolute market share (%)
profitability
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Table 6.3
Brand rank Return on sales (%)
Market share rank
and return on sales 1 17.9
for grocery brands 2 2.8
3 –0.9
4 –5.9
building efforts, it is still just two-thirds the size of the brand leader Cadbury Dairy
Milk, however its brand strength allows it to charge a premium over the brand leader,
(usually about 5 per cent in-store); in addition, each standard bar of Galaxy is about
5 per cent smaller than the leading brand and so costs less to manufacture. In the con-
text of a single bar of chocolate these differences are irrelevant to the consumer, but a
5 per cent saving on 35,000 tonnes (the volume of Galaxy produced each year) is con-
siderable as is the incremental contribution which the premium price confers. So while
Galaxy has not captured the leadership position, it is much more profitable than pre-
dicted by the research findings shown in Table 6.3. It has rebuffed competition from
new entrants in the own-label category as well as a branded challenge from Nestlé.
Brand leverage
Strong brands generate these exceptional levels of profit through a triple-leverage
effect. The most obvious effect is through the higher volume that the brand achieves,
which allows higher asset utilisation and scale economies. The second source of lever-
age is through the higher prices that the brand obtains. Sometimes this price
premium occurs at the consumer level, but more frequently it is earned at the retailer
or distributor level. Because they have a strong consumer franchise, successful brands
are more able to resist trade pressures on their margins. This, in turn, generates supe-
rior earnings. On average, premium price brands earn 20 per cent higher return on
investment than discount products.12
Finally, brand leaders also have lower unit costs. This may occur primarily in develop-
ment, production or marketing, depending on the structure of the industry’s value
chain.
The impact of these three leverage advantages for a brand leader can be illustrated in
a typical fmcg situation. For example, in the UK Coca-Cola has around three times
the market share of Pepsi. The problems this creates for the brand follower are illus-
trated in Table 6.4. In terms of unit market share, the leader is three times bigger than
the follower. The spread at the net sales level, however, expands because the follower
has to give away greater trade discounts. In addition, the leader will normally have
some sourcing and operating advantages at the cost of goods level, which together
with its price advantage significantly widen the gross margin. Finally, supposing the
brand leader spends 15 per cent of its turnover, or €25.5 million, on marketing,
advertising and promotion. Now, to have the same unit marketing costs, the follower
would spend €8.5 million. Unfortunately, if the brand leader were outspending the
follower by three to one, the follower’s market share would fall even further.
Invariably, to maintain its position, the follower is forced to spend more (in this
example, it spends half as much as the brand leader). This leads to two ‘laws’ of
brands – the bigger the brand, the more (in total) is spent on marketing; and the
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Table 6.4
Brand Unit Net sales Gross Marketing Contribution
Brand leaders: market (€m) margin (%) expenses to overheads
leverage on share (%) (€m) and profit (€m)
profitability
Leader 60 170 60 25.5 76.5
Follower 20 50 52 7.5 18.5
Follower with ‘equilibrium marketing budget’ 12.8 13.2
bigger the brand, the less (in unit cost terms) is spent on marketing! The end result is
that the brand leader’s market share advantage is substantially magnified at the profit
level. Here a brand advantage of 3:1 results through leverage in a profit contribution
advantage of nearly 6:1. There are, of course, exceptions to this pattern, for example,
the case of Galaxy discussed above.
The brand barrier

Today, competition can quickly copy advances in technology or product formula-
tions. Competitors can easily reproduce a cigarette, a soft drink formula or a strategic
consultancy. But what cannot be copied is the Marlboro, Nescafé or McKinsey brand
personality. By focusing on building brand values, the company builds barriers to
competitive attack.
A brand leader is in a strong position to fend off aggression. First, it has financial
strength – almost invariably it will have the highest market share and highest profit
margins. This should enable it to outgun competitors in terms of aggressive promo-
tion and innovation. Second, the trade is always reluctant to add new brands if the
existing brand leader satisfies customers. Third, the brand leader can exploit its supe-
riority, as Nescafé does with its ‘coffee at its best’ positioning. Without a major
‘strategic window’, only substantial underinvestment in quality and brand support is
likely to dethrone a successful brand.
Avenues for growth

The product life cycle is a well-known phenomenon (see Chapter 5). The product
reaches a peak and eventually dies as its markets mature and new technology replaces
it. But the product life cycle refers to products, not to brands. There is no reason why
a brand cannot adapt to new technologies and move from mature into new growth
markets. Such repositioning explains the extraordinary longevity of many brand
leaders – brands that have held their leading positions for generations.
Successful brands adapt by incorporating developments in technology, packaging,
tastes and lifestyles. Pepsi illustrates how, by a subtle adaptation in product form and
communications, it can keep a brand up to date to successive generations of teenagers.
Johnson & Johnson’s baby shampoo is only one of many examples of brands that have
moved into new segments to continue growth. Strong brands can increasingly be rolled
out geographically to new countries and form the basis for powerful regional or global
brands. Finally, by brand extensions the brand name can often be used to enter new
fields. For example, by extending its brand name into ice-cream, Mars stimulated the
growth of the European premium segment and quickly captured brand leadership.
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Motivating stakeholders
Companies with strong brands find recruitment easier. People want to work with
companies that exhibit success. Strong brands also widen share ownership by increas-
ing awareness and understanding of the company. Finally, successful brands elicit
community and governmental support. For example, in recent years, western govern-
ments have competed with inducements to attract the better-known Japanese
companies to build their brands with them. They have learned that companies with
portfolios of powerful brands offer the security and long-term employment prospects
that start-up companies cannot match.
Multibranding, line and brand extensions
If a company is to progress beyond being a narrow niche player, it will have to

broaden its product range and market coverage. Frequently a company will target
several brands at the same broad market. In some cases it will extend the same name
over the brand family; in others, it will choose to use independent brand names. Line
extensions are new products introduced into the existing product category and under
an existing brand name. Examples are new flavours, forms, pack sizes, etc. Multibrands
are brands in the same product category, but with different brand identities. For exam-
ple, Procter & Gamble pursues a multibranding strategy in detergents with its Tide,
Bold, Dash, Cheer and Oxydol brands. Brand extensions involve using the same brand
name, successfully established in one market or channel, to enter others. It is often
termed brand stretching when the markets are very different. For example, the success-
ful Porsche name has been used to develop a range of sunglasses, while the Yamaha
name has been attached to pianos, hi-fi products and sporting equipment.
There are two reasons for the development of multibranding and line extensions. The
first is the increasing segmentation of markets. In the earliest stage of the develop-
ment of a market, a single product will often be sufficient. Demand is normally
homogeneous and too small to warrant a company employing a range of products.
Then, as the market develops new segments are added, consumer requirements frag-
ment and new branding opportunities occur. As customer needs diverge,
differentiated distribution channels evolve, providing a second stimulus to separate
branding. In recent years, further momentum has been given to the growing range by
the development of new flexible manufacturing techniques that have lowered the
cost of product variety, and by new targeted marketing and advertising media which
access specialised customer segments. Finally, aggressive competitors, particularly
from Asia, now view multiple brands, innovation and creative market segmentation
as powerful competitive strategies for today’s affluent markets.
Two types of branding can be identified: horizontal and vertical. Horizontal branding is
aimed at differentiating distribution channels rather than consumers. By giving dif-
ferent retailers, distributors, or the Internet channel specific brands, the manufacturer
aims to increase distribution and market share. For example, Reebok markets its
Premier range through speciality sports shops with the Classic range sold through
mass market stores. Horizontal branding is often low cost because the brands may
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Multibranding, line and brand extensions
have only cosmetic differences. Vertical branding targets different customer groups
with differentiated branding strategies. In this case the distribution channels may or
may not be the same. In highly segmented markets, single brand strategies are rarely
effective. For example, Amstrad, which built a leading position in the home com-
puter market, found its brand image a major handicap in its efforts to penetrate the
business segment. A separate brand identity with an image, sales and service system
geared to the corporate market would have been a more effective means of attacking
the new target market.
Vertical branding is more powerful than horizontal. Its major problem is often the
cost of building distinct brand identities.13 Ford paid €2.5 billion to buy the Jaguar
brand to provide an entry into the executive car market. Toyota invested substan-
tially more to develop its Lexus brand. Thus, while vertical multibranding can
generate significantly higher revenues, it offers fewer opportunities than horizontal
multibranding for economies of scale and shared purchasing, marketing, distribution
and service costs.
Today there is a growing use of line and brand extensions, umbrella brands and par-
ticularly the company name to front individual products, rather than multibrands.
Most of the top brand names now are company brands – Coca-Cola, Sony, Mercedes-
Benz, Microsoft and Cadbury. Brand extensions and corporate branding have grown
for three reasons. First, the high failure rate of new products has encouraged compa-
nies to look to extensions to reduce the odds of failure. Attaching a successful brand
name to a new product reduces the buyer’s perceived risk. It may inherit brand values
of ‘prestige’ or ‘technical performance’ from the original brand. The brand name may
offer an implicit quality guarantee. In virtually all new product concept tests, the
addition of an established brand name such as Cadbury or Sony will greatly increase
the initial reaction, interest and willingness to try the product. Second, building a
complete new brand is expensive. In the grocery market, for example, €30 million is
probably the minimum required for developing a successful new product. In general,
it costs less to launch a product when a well-known family brand name is behind it.
Finally, companies look for economies of scale and scope in focusing resources
around one umbrella brand. With too many brand names, promotional resources can
be fragmented and the brands can be outgunned by competitors able to concentrate
support around one name. For example, Electrolux operates five brand names in the
UK white goods market: Electrolux, Zanussi, AEG, Tricity and Bendix. Together these
brands give Electrolux the largest market share. But its rival, Siemens, with only one
brand, outspends each of Electrolux’s individual brands and consequently the
Siemens brand is growing considerably faster.
Umbrella branding, however, is no panacea and failures of brand extensions are
common. A product will fail, even if backed by a strong umbrella brand, if it offers no
differential advantage over existing brands. Again it will fail if it does not get suffi-
cient marketing support during its launch phase to generate awareness and trial.
Many extensions fail because they are launched into a different target market from
the original brand. In the new market, the brand’s associations may not be valued.
For example, Levi, which had built a brilliant brand in jeans, attempted to market a
range of high-quality formal suits to middle-class males under the Levi name. The
brand extension failed because the new target market did not see the informal,
denim associations of the Levi name as adding value in this sector. Levi subsequently
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introduced the Docker brand to target successfully a different sector of the clothing
market. Brand extensions often fail where the competitive advantage is different. For
example, Procter & Gamble uses the Pantene pro-V name for its cosmetic range of
shampoos and Head & Shoulders for its anti-dandruff range.
In some cases, extensions can damage the core brand. A traditional beer brand might
be damaged by the associations brought by a low-alcohol brand extension. A sharp
brand positioning can be weakened by new category brands. This is a particular
danger for names that have become almost generic product descriptions – Kleenex,
Perrier, Tampax. Cadbury’s association with high-quality chocolate was certainly weak-
ened by its extension into mashed potato and dried milk. Excessive extension can
lower the brand’s quality image. The use of the Ralph Lauren Polo on a wide range of
clothing distributed through retail outlets ranging from exclusive department stores to
the TK Maxx discount chain has eroded its image in recent years. Pharmaceutical com-
panies have generally been wary of umbrella branding because of the danger of any
bad publicity arising from one brand area spilling over into other fields.
The principles for deciding between brand extensions and individual brand names
are illustrated in Figure 6.6. The right approach depends upon the similarity of the
positioning strategies of the brands. Four brand extension options are identified:
■ If the brands appeal to the same target market segment and have the same differ-
ential advantage, then they can safely share the same company or range name.
Here, there is consistency in the positioning strategies and the same name is
applied to different products. Examples of this type of extension are Dell, Tesco,
Dunhill and Sony.
■ If the differential advantage is the same but the target market differs, then the
company name can be extended because the benefit is similar. However, it is
important to identify the ‘grade’. For example, both the Reebok Premier and
Classic ranges offer differential advantages based upon performance, but the
more expensive Performance marque appeals to a much more demanding
segment of the market. The supplementary grade identification acts to preserve
its prestige positioning.
Differential advantage
Similar Different
Company or range name Company plus brands

(IBM, Timotei) (Kellogg’s Cornflakes,
Similar Kellogg’s Rice Krispies)
Target
market
segment Company plus grade ID Unique brand names
(Mercedes 200, (Procter & Gamble: Tide,
Different Mercedes 500) Bold, Dreft, Ariel, etc.)
Figure 6.6
Brand extension
strategies
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Revitalisation, repositioning and rationalisation
■ If a company has different differential advantages, then it should use separate

brand names. It can find some synergy if the brands are appealing to the same
target market, by using the company name with separate brand names. For exam-
ple, different brands of Kellogg’s may well be selected within the same family unit.
■ But if both the target customers and the differential advantages are different, then
using unique brand names is logically the most appropriate strategy. So Mars
believes that it is worth losing out on the advantages of a common corporate
name in order to position the brands separately in the market – to give each brand
a distinct positioning appeal to a separate benefit segment. Similarly, Toyota has
separately positioned its Lexus brand because it wishes to position it uniquely,
away from its existing models.
Over time it will be necessary to revitalise and reposition the brand. Many factors
may erode a brand’s franchise and profitability: market decline, new technology,
changing tastes, rising costs and new competition. To improve brand performance,
management has two broad alternatives: raising volume or increasing the brand’s
productivity (Figure 6.7). The former should be explored first. Sales volume can be
increased by either expanding the market for the brand (revitalisation) or enhancing
its competitive position in the market (repositioning).
Improving
brand performance
Raise Improve
volume productivity
Brand Brand
revitalisation repositioning
Brand Brand Raise Cut

Figure 6.7 elimination revitalisation prices costs
Improving brand
performance
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Brand revitalisation
Brand revitalisation can be explored in four directions:
■ Finding new markets. Brands such as McDonald’s, Reuters and the Financial Times
have compensated for the saturation of their domestic market by a strategy of geo-
graphical expansion. Expansion into new countries has been the major engine for
the growth of these brands since the 1990s. Pharmaceutical companies seek new
markets for maturing brands by searching for applications in new therapeutic
areas. For example, GSK’s Zantac was first approved for the treatment of ulcers and
later it was allowed for use in cases of heartburn and indigestion.
■ Entering new segments. Identifying new segments is one of the most common ways
of expanding the market for a brand. Falling prices and increasing customer aware-
ness facilitate such strategies. For example, Nokia’s growth in the mobile phone
market was achieved by successively targeting top managers, then the middle
management segment, then the general public and finally the children’s segment.
Johnson & Johnson’s baby shampoo was languishing until the company looked
towards adults who wash their hair frequently and needed a mild shampoo.
■ Finding new applications. The potential market for the brand can be expanded by
suggested new customer needs. The classic example of this is Arm & Hammer
baking soda, which increased its sales from $15 million in 1970 to over $400 mil-
lion in 2000 by finding new uses for baking soda – primarily as a deodoriser for
refrigerators, sinks, animals, etc.
■ Increasing brand usage rate. This may be done by increasing the frequency with which
the brand is consumed: making it easier to use (instant tea), providing incentives for
use (frequent flyer discounts), reducing the disincentives for use (decaffeinated coffee),
or finding new ways to increase the quantity used (large bottles).
Brand repositioning
Brand repositioning focuses on increasing volume, not by expanding the market, but
by winning share from competitors. Each of the following avenues can be reviewed:
■ Real repositioning. Management may need to update the brand by incorporating

the latest technology, functions or design. Honda, for example, has continuously
repositioned its best-selling Accord model to maintain its position at the forefront
of value and fashion.
■ Psychological repositioning. The company can seek to change the buyer’s beliefs
about the competitiveness of the brand. For example, the highly regarded Tesco
supermarket group used its recent advertising to emphasise that it had high-
quality merchandise as well as competitive prices. Psychological repositioning
will work only if the buyers truly underestimate the value of the brand.
■ Competitive depositioning. Comparative advertising is frequently used to seek to
alter customers’ beliefs about competitors’ brands and to suggest that they repre-
sent poor value. Volkswagen used this strategy against Ford in its advertising.
■ Reweighting values. Sometimes buyers can be persuaded to attach greater impor-
tance to certain values in which the brand excels. For example, Volvo emphasised
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safety as a criterion for selecting cars. It then built on this position, adding per-
formance to safety.
■ Neglected values. Sometimes new choice criteria can be introduced to buyers. The
Times tabloid edition was positioned on the claim that it was more convenient for
the reader – a value not previously thought salient in the market for serious news-
papers. The Body Shop brand was founded on the then unique value that its
products were not tested on animals.
■ Changing preferences. It may be possible to switch the preferences of buyers.
Buyers may be convinced to switch from low-price products to brands offering
higher quality and economic value, for example.
■ Augmenting the brand. A brand’s competitive position may be enhanced by offering
additional products and services alongside the core product. Guarantees, after-sales
service and advice can all add value.
Brand productivity improvement

Brand productivity improvement focuses on profit rather than volume as the brand
objective. Such a focus is appropriate when management has decided that the brand
has limited market potential. There are three ways of squeezing more profit from a
static or declining brand. First, costs – fixed and variable – can be cut. Inevitably, if
this means disinvesting in the brand, it will have long-term consequences for the
brand’s market share. Second, prices can be increased. In the short term this will
almost always boost profitability, even if volume declines. For example, if a typical
brand has a gross contribution of 50 per cent and a net margin of 8 per cent, then
pushing up prices by 10 per cent will boost net profit by half even if volume drops by
10 per cent. Finally, profits will be boosted normally by range rationalisation. By elim-
inating marginal lines, costs and investments are likely to be cut by more than the
volume lost.
Brand elimination
Finally, brand elimination may be the required decision. This may be because the
brand is no longer profitable, but there are often other reasons. If a company has
grown by acquisition, for example, it often ends up with too many brands. Its brand
name portfolio may be too big because the brands overlap and cannibalise one
another, some brands may be too small to be worth supporting, or the company may
need to focus its resources around one or two brands to avoid being outgunned by
competitors. Globalisation is another motive for brand rationalisation. Companies
such as Mars, Nissan and Unilever that have previously supported national brands
increasingly want to standardise around regional or global brand names.
The problem with eliminating a brand is that it is difficult to prevent many cus-
tomers switching to competitors’ brands. It is also expensive to manage the switch.
For example, in the US Black & Decker acquired GE’s small appliance business and
quickly dropped the GE brand name. Four years later, and after spending €160
million promoting the Black & Decker name, it was found that the old GE brand was
still preferred by two out of three buyers.
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If it is necessary to focus resources around fewer core brands, three options should be
explored. First, the company should look for economies that might reduce the costs
of the minor brand. For example, its manufacturing, distribution and overheads
could be merged and its market identity limited to a badging operation. Another
alternative to killing the brand might be harvesting it – allowing the brand franchise
to erode gradually rather than dropping it. Finally, brands can be amalgamated under
a shared brand name. For example, when Whirlpool acquired Philips’ white goods
business, the brands were marketed for several years under a dual identity.
Regional and global brands
In the past, markets were dominated by local brands. Even the biggest multinationals
allowed local subsidiaries great autonomy in developing brands to fit the local envi-
ronment. In recent years, three forces have led companies to look more at global or at
least regional brands. The most powerful force has been the pressure to reduce costs.
Many western companies were hard hit in the 1980s and 1990s by Asian competitors
ruthlessly exploiting economies of scale in research, development, manufacturing
and marketing to build high-quality, low-price global brands. Second, many compa-
nies have needed to accelerate the speed with which they innovate internationally.
Companies such as BT in telecommunications and Unilever in groceries proved too
slow in recent years in rolling out breakthrough brands, and were often leapfrogged
by faster competitors. Finally, the growing internationalisation of tastes and buying
patterns has made the development of global and regional brands more feasible.
Global and regional brands have obvious advantages. They usually mean lower devel-
opment, production and marketing costs. They should facilitate the professionalism
of brand planning and decision making. They should result in faster innovation by
reducing the delays caused by local adaptation and policy making. Finally, global
brands offer spin-offs in international brand leverage: increasingly mobile customers
see the same brands in different countries. One constraint is that global brands may
fail to match local requirements. In addition, taking key decisions out of the hands of
local managers can severely affect the motivation and commitment of personnel in
the host countries.
Much of the debate on global brands, however, is oversimplistic. In reality, it is not a
matter of whether or not brands can be global, but rather which functions and tasks
should be centralised and which should be left to managers in the local market. A
brand, it will be recalled, is a core product upon which basic marketing features and
then augmented attributes are superimposed to differentiate and add value to it.
Some of these features and attributes are more open to standardisation across markets
than others. The core product, and the research and development that generates new
products, are usually centralised. Product functionality and use (e.g. how people
listen to music or drive a bulldozer) tend to be universal characteristics. In addition,
scale economies tend to be important here as these are high-investment areas. Basic
brand features – design, packaging, logo and name – can also generally be standard-
ised across countries if planned systematically.
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Regional and global brands
At the next layer of branding – positioning and advertising – the difficulties begin to
become greater as culture, attitudes, economics and language impinge on the brand’s
values and make standardisation more difficult. The degree of standardisation possi-
ble varies with the product and the market. National values and traditions are still
very important in food, but much less so in electronics. Cultural values are less
important in youth and more affluent markets than they are in mature and low-
income ones. Moving further down the marketing chain to selling, promotion and
distribution, these decisions are invariably specified locally because of the sharp dif-
ferences that normally occur in market and institutional characteristics. To
summarise, global branding is a matter of degree. Few, if any, brands are marketed in
an identical way across the world, or even across a region. But more brands have
characteristics that are standardised across regions – with the product formulation
and the brand name being towards the fore.
Critics often confuse the move towards global branding as implying greater homogene-
ity and standardisation. This is certainly incorrect. Markets will be more segmented in
the future than today, but the basis of segmentation will change. While in the past geo-
graphical boundaries were a major way of distinguishing customer groups, today
segments cross geographical boundaries (Figure 6.8). Consumers living in London’s
Knightsbridge or Kensington have more in common with those in Mid-town
Manhattan or the seventh arrondissement of Paris than they do with those living in
London’s Brixton or Coventry’s Bell Green. Across both industrial and consumer mar-
kets the broad economic, social and cultural trends favouring first regional and then
global brands are clear. Yet there will be no simple answers. For the foreseeable future,
management will need to achieve a balance between the opportunities to be had from
global brands and the need to recognise and adapt to local market differences.
Country A Country B Country C Country D
Segment A
Segment B
Segment C
Segment D
Figure 6.8 Segment E

From inter- to intra-
segmentation
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Buying versus building brands
There are two routes a company can follow to obtain brands – it can build and
develop them, or it can acquire them, through licensing or acquiring the companies
that possess them. The former is a high-risk, slow and expensive route. Studies show
clearly the extraordinarily high failure rate which occurs in new brand development.
Fewer than one in a hundred new product ideas makes a satisfactory profit in the
market. Further, even with high-potential products it takes a long time and a heavy
investment to build them into brands and position them successfully in the minds
of consumers.
In contrast, acquisitions are a deceptively quick route to obtaining a brand portfo-
lio. For example, in acquiring Rowntree, Nestlé went from nowhere to become a
leading player in the UK confectionery market. Accounting conventions in most
countries also increase the perceived attractiveness of acquisitions. While internal
brand development expenditures are treated as costs that reduce current profitabil-
ity, acquisition expenditures are not normally immediately or fully written off
against profits. Instead they are written off directly on the balance sheet. While the
cash flow implications of internal development and acquisitions may be identical,
the former will appear to reduce the return on shareholder funds and the latter to
increase it. These advantages of speed and benevolent accounting conventions have
made acquisitions an increasingly popular route, especially for British and
American companies.
Despite the attractiveness of acquisitions, there is considerable evidence that most
fail to generate long-term value for the acquirer’s shareholders or to build lasting
brand portfolios.14 Four problems have brought down many of the companies that
have pursued the most ambitious acquisition strategies.
■ Excessive gearing. Many companies financed acquisitions through high levels of

borrowing. Subsequently many of these companies became vulnerable when prof-
its failed to reach their over-optimistic expectations, leaving them unable to meet
interest and debt repayment obligations.
■ Incoherent brand portfolios. Often the acquisitions leave the company with a ragbag
of brands, with different brand names in different countries, conflicting position-
ing strategies and no synergies with the existing business.
■ Inadequate expertise. Frequently the acquirer lacks the knowledge or capability to
appraise the real value of the acquisition in advance or subsequently to add value
to it.
■ Pay too much. Acquirers often pay too much to obtain a business. The stock market
can be expected to value most companies fairly. However, to purchase a company,
the acquirer usually ends up paying a premium of 30–50 per cent above the pre-
bid valuation to win the acceptance of the target company shareholders. Such
premiums can be justified only by quite exceptional synergies between the two
businesses.
Of course, acquiring brands rather than building them sometimes makes sense.
Table 6.5 provides a checklist for managers, highlighting those conditions under
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Buying versus building brands
which acquisitions are likely to pay off. If it is a low-growth, unattractive market,

building a new brand may cost too much. It is generally cheaper to buy competition
and competitors’ distributive space than to beat out well-entrenched brands. The
other advantage of these types of market is that the relative cost of acquisitions may
be low. Often the stock market undervalues these apparently boring companies and
there is substantial restructuring potential in selling off parts after the acquisition.
Acquisitions work when there is real potential synergy – when the acquirer can
reduce joint costs or improve marketing competence by making acquisitions. Finally,
the strategic opportunities offered by the acquirer’s existing brand portfolio and its
corporate cash situation play a major role. If the company’s current products are ‘me-
too’, and if it has limited skills but abundant cash spun off from its portfolio of
mature products, then acquisitions appear attractive. By contrast, it is generally better
to develop and build on the company’s own brands if these are operating in growth
markets, if the company possesses potentially strong brands and if inside the com-
pany there are strong marketing and development skills. These five sets of factors are
the key criteria in making judgements about the balance between building and pur-
chasing brands.
Table 6.5
Build Buy
Buying versus
building brands Market attractiveness
Market growth High Low
Strength of competitors Weak Strong
Retailer power Weak Strong
Relative cost of acquisitions

Industry attractiveness High Low
Valuation of company Full Undervalued
Restructuring potential Low High
Brand’s potential Realised Unrealised
Acquisition’s potential synergy

Cost reduction potential Low High
Marketing competence Unchanged Increased
Complementarity Low High
Relevant management expertise Low Transfers
Brand’s strategic opportunity

Product performance Breakthrough Me-too
Positioning concept New Mature
Market opportunity High Low
Corporate situation
Growth potential High Low
Cash situation Average Abundant
Marketing/R & D capability Strong Weak
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Valuing brands
Companies with strong brands are increasingly exploring how to quantify their
value. Some companies want to place these brand values on their balance sheet to
emphasise the company’s asset strength. If prices are not put on brands, then a com-
pany can easily be undervalued by the stock market and become a takeover target.
Brands too are sold or licensed so that buyers and sellers need to place a value on
them. Finally, if companies are to invest in brands, it is important to see how their
values change over time to judge whether the investment pays off.
There are five main methods of valuing brands:
■ Price premium valuation. Where successful brands obtain price premiums over
unbranded products, the discounted value of these future premiums can be the
basis for brand valuation.
■ Incremental sales valuation. If the value of the brand appears in higher market
shares rather than premium prices, incremental sales over an unbranded product
can be used to estimate the value of the brand.
■ Replacement cost value. The estimated cost of developing a brand with comparable
stature to the current brand can be used for valuation.
■ Stock market valuation. For some companies it is possible to decompose the stock
market valuation into its components: physical assets, industry factors and other
intangible assets. The value of the brand can then be estimated as the residual.
■ Future earnings valuation. The most satisfactory approach is to estimate the dis-
counted present value of future earnings attributable to the brand. Essentially this
amounts to determining the multiple to be applied to current brand earnings –
stronger brands achieving higher multiples. RHM, one of the first companies to
value brands on the balance sheet, estimated brand strength from an analysis of
the brands’ rankings in terms of leadership, brand support, market attractiveness,
international appeal and brand protection.
Brand valuation methods are always highly approximate. Future market conditions
and hence long-term brand earnings are difficult to predict. In addition, brands are
often not stand-alone. Where brands are marketed under corporate names (e.g.
Philips) or both corporate and individual brand names (e.g. Kellogg’s), it is virtually
impossible to separate the specific earnings attributable to a single brand. Finally,
brand values are entangled with other intangible assets (e.g. staff, patents, market
entry barriers). For example, the value of an advertising agency ‘brand’ could be sub-
stantially changed by a walk-out of senior personnel. These and other factors make
all such estimates of value hazardous.
The branding dilemma
Brand management is at the centre of the conflict between short-term profits and
long-term investment. For most successful companies, their brands are their most
valuable assets. Brands generate customer loyalty and through this they build
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The branding dilemma
profit, growth and shareholder value. Yet in many western companies the task of
building and sustaining the company’s brands has not attained priority on their
board’s agenda.
The major reason for neglecting brands has been the short-term pressures that many
management teams feel they face. The City’s priority is seen as short-term company
profits, and companies have built their management incentives and bonus schemes
around achieving short-term profit targets. The ethos in many companies is for quick
results: managers are expected to show results fast and high-flyers anticipate rapid
career progression. All these pressures act to detract from the long-term consistent
investments that brands require.
Investing in brands fits badly in a short-term profit-oriented business. Building and
sustaining brands requires a long-term focus. It takes years to develop a brand image
and augment it with support services and product enhancements. Such investments
do not have a pay-off in increased short-term sales and profits. Not only is the pay-off
long term, but it is uncertain and rarely quantifiable. Faced with such elusive, long-
term and intangible benefits, it is not surprising that hard-nosed managers heavily
discount the case for brands.
In contrast, brand managers find it easier to make the case for consumer and trade
promotions. While above-the-line expenditures (brand image advertising) are long
term, below-the-line spending generates short-term results. Because it provides a
direct monetary incentive to consumers or the trade to purchase now, promotional
spending is quick and measurable. Another advantage of promotions is that they are
variable costs, incurred as sales are increased, and in this sense they are self-funding
and less risky than up-front advertising investments. Unfortunately, promotions do
not build brands and their short-term advantage is often at the expense of the
brand’s long-term positioning. Promotions can, in the long run, erode a brand’s
values by cheapening its image and focusing customers on price.
Another disincentive for investing in brands is that the resulting assets do not appear
on the balance sheet. If a company fails to invest in its physical assets, this will show
up as a diminution of the company’s net asset base. But brand investments are
treated as costs, which like other overhead expenses reduce the company’s profitabil-
ity and accrual of assets. Few companies have management accounting systems that
effectively distinguish between brand-building investments and overhead costs, and
so both are often treated as low value-added activities which can be cut back as neces-
sary to boost profitability.
For management under pressure to boost short-term profits, brand investments are
tempting targets. Cutting them is less painful than firing staff, and the positive impact
on profits is fast. In fact, brand disinvestment has the opposite effects to brand invest-
ment. While, with the latter, the beneficial effects (on sales) come slowly and the
apparent negative effects (on profits) are immediate, with brand disinvestments, the
beneficial effects on profits are quick and the negative impact on the brand’s market
position occurs slowly. For example, taking €1 million out of the advertising budget of a
strong established brand such as KitKat or Nescafé would, in the short term, have a
negligible effect on market share and would consequently boost current profits by the
€1 million. Managers are often tempted to believe that cutting back on brand support is
less risky because the costs are not immediately apparent. Later they discover that
market share, once given up, is almost impossible to regain.
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A number of companies have tried to develop safeguards to short termism affecting

their brand equity. Colgate Palmolive and Canada Dry, for example, introduced ‘brand
equity managers’. They were tasked to protect brand equity by measuring it periodi-
cally and being on guard for short-term policies that threatened to erode it. Heinz
changed bonus arrangements in order to shift managers from an excessive preoccupa-
tion with short-term profits that were seen as damaging their brands’ long-term
positions. Procter & Gamble has long had management accounting systems that sepa-
rate ‘investments in the future’ from operating and overhead costs. This
differentiation means that managers seek to increase rather than cut back on brand
investments. Perhaps the best support for brand investment is for members of top
management to be articulate supporters of the value of their brands: stressing to share-
holders their brand strengths and the long-term value of the brands for the business.
Summary
Building successful brands is at the heart of marketing management and strategy. When a
company creates strong brands it attracts customer preference and builds a defensive
wall against competition. Successful brands are founded on a high-quality core product.
But since products are easily copied, brand building also requires skilful differentiation
and the combination of added values that augment the core and offer customers
enhanced benefits. A brand achieves its potential when target customers have complete
confidence in its quality and image.
Strong brands obtain good prices and high market shares, and offer the company
avenues for further growth through line extensions and the penetration of new markets.
While products can come to the end of their life cycles, brands need not do so if they are
continually updated and repositioned. Companies with portfolios of strong brands, not
surprisingly, achieve premium valuations from stock market investors.
The creation of strong brands requires a long-term focus. It means investments in brand-
building activities that do not have an immediate pay-off. Many of today’s companies
have become too short-term oriented. They are unwilling to invest in building brands.
Worse, they often destroy long-term brand equity by reducing brand support. While such
activities can boost short-term earnings, they permanently erode the company’s long-
term market competitiveness.
Questions
1 What is a brand? Are brands limited to consumer markets?

2 A company intending to roll out a new chain of fast-food restaurants aims to build them
into a strong brand. What advice can you give?
3 How could you determine what the brand identity and image is of your company or
product?
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Notes
4 Why is it worth investing possibly millions of euros to build a strong brand image?
5 Discuss the advantages and disadvantages of umbrella branding.
6 Why do some companies fail to appreciate the value of brands and neglect to invest in
their brands?
Notes
1. ‘Price to book ratio of brand name stocks’, Financial Times, 23 November 1991, p. III.
2. Theodore Levitt, Industrial Purchasing Behavior: A study of communications effects (Boston,
MA: Division of Research, Graduate School of Business Administration, Harvard University,
1965).
3. David A. Aaker and Erich Joachimsthaler, Brand Leadership (New York: Free Press, 2000).
4. Theodore Levitt, ‘The morality of advertising’, Harvard Business Review, July–August 1970,
pp. 89–95.
5. David A. Aaker, Building Strong Brands (New York: Free Press, 1996).
6. Jean-Noel Kapfferer, Strategic Brand Management, 2nd edn (New York: Free Press, 1997).
7. According to data from the Council of Mortgage Lenders.
8. Adapted from Theodore Levitt, ‘Marketing success through differentiation – of anything’,
Harvard Business Review, January–February 1980, pp. 83–91.
9. Christopher W. L. Hart, ‘The power of unconditional service guarantees’, Harvard Business
Review, July–August 1988, pp. 54–62.
10. Robert A. Buzzell and Barney T. Gale, The PIMS Principles: Linking strategy to performance
11. ‘The year of the brand’, The Economist, 24 December 1988, p. 93.
12. Simon Broadbent, ‘Diversity in categories, brands and strategies’, Journal of Brand
Management, August 1994, pp. 9–18. Also Donald K. Clifton, Jr and Richard E. Cavenagh,
The Winning Performance: How America’s high growth midsize companies succeed (London:
Sidgwick & Jackson, 1985), p. 72.
13. David A. Aaker, ‘Should you take your brand where the action is?’, Harvard Business Review,
September–October 1997, pp. 135–45.
14. Philippe Haspeslagh and David Jemison, ‘Creating value in acquisitions’, in Michael Gould
and Kathleen Luchs (eds), Managing the Multibusiness Company (London: Routledge, 1996).
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9736 MMST_C07.QXD 12/5/05 2:50 PM Page 195
‘Nothing is more powerful than
an idea whose time has come.’
Victor Hugo
Chapter 7 INNOVATION AND NEW PRODUCT

DEVELOPMENT
Innovation and new product development (NPD) have become the key strategic focus for
today’s most successful companies. Continuous innovation is perceived as the only way
of sustaining above average growth and profitability. Today, companies know that
aggressive, low-cost competitors make it increasingly difficult to maintain profit margins
on current products. Only by continually updating these products, adding new ones and
broadening the range can companies hope to maintain profit performance and market
leadership. However, becoming one of these new fast-track innovators is not easy, since
it requires fundamental changes in an organisation’s structure and philosophy. Top
managers are realising that unless they accept these challenges the competitive
positions of their companies will be rapidly eroded.
This chapter explores the central questions of innovation and new product development.
First, how should managers view innovation and how can opportunities for innovation be
identified? Second, why are top companies now making innovation their number one
priority? Third, what are the barriers to building organisations that can achieve fast
innovation and how can they best be overcome?
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Chapter 7 Innovation and new product development
Meaning of innovation
For a manager, innovation should be defined as: developing and delivering products or
services that offer benefits that customers perceive as new and superior. Opportunities for
innovation are created by environmental changes that generate new customer needs
or make possible better solutions to current needs.
Changes in the environment continually create opportunities for innovation in two
ways. First, changes in demographics, living standards, political forces, technology,
culture, lifestyles and fashion create new needs. For example, the current concerns
with pollution and protection of the environment create opportunities for electric
cars, pollution control equipment and packaging that is more environmentally
friendly. The ageing of the population creates opportunities for new retail concepts,
health care and housing. The break-up of the Soviet Union created new market
opportunities in eastern Europe and the liberalisation of the Chinese economic and
political system is proving to be even more significant. The list of such changes and
consequently the new needs generated can be extended indefinitely. Companies such
as Mercedes-Benz, Nokia, GE, Honda, Coca-Cola and Altria owe their continued suc-
cess to seizing these opportunities.
Second, environmental changes make possible new solutions to both current and new
customer needs. In particular, advances in science, technology and the ability to
handle information allow companies to apply this new knowledge to enhance the
satisfaction they can offer customers. They have opportunities to develop and deliver
new products or services that are more efficient than current ones. Not only does
new knowledge make possible better products and services, but it can also provide
the means for lowering costs and improving quality. For example, new management
tools such as corporate re-engineering and total quality management enable cost,
time and defects to be taken out of the firm’s operational processes. Through such
innovations companies boost their growth and earnings potential by offering supe-
rior customer value and making competitive offerings obsolete.
In summary, to identify opportunities for innovation managers need to analyse and
assess the implications of the environmental changes taking place around them.
They need to ask what are the key changes occurring in the economy, in society and
in technology, and what threats and opportunities they present for customers, com-
petitors and their own business.
Invention is different from innovation. Many inventions fail to build markets. An
invention is a new product; an innovation is a new benefit. Customers do not want
new products, they want solutions that offer new and superior benefits. To be a suc-
cessful innovation, a new product must meet four benefit criteria:
■ Important. The new product or service must offer benefits that will be perceived as
important by customers. For example, a new watch with a wireless connection to
continually update the time from the atomic clock at the Greenwich observatory
would be a technical feat but would not be regarded as a substantial benefit by
most consumers.
■ Unique. The benefits offered by the new product must be perceived as unique. If
customers believe that current offers provide the same advantages, the new idea
will not be valued.
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Meaning of innovation
■ Sustainable. A new product may offer benefits that are unique and important, but if
it can be quickly copied by competitors it will not offer much of a market opportu-
nity. Sometimes patents provide a barrier to competition. But in most industries,
speed to market and brand building provide the most effective means of sustaining
the value of the innovation.
■ Marketable. The company must have the capability to market the product. This
includes designing a reliable and effective version of the product, producing it at a
price customers can afford, and establishing an effective distribution system to
deliver and support it.
Many companies introduce new products that fail on one or more of these criteria.
Inventors, fixated by technical novelty, are particularly prone to undervalue these
customer benefits. For example, Bell Labs invented the revolutionary transistor but
failed to find a market for it. It was Sony that saw the opportunity to use transistors
to build cheap, reliable radios. Kodak held early patents on digital camera technology
but failed to develop an effective marketing programme or build barriers to entry. In
fact, most of the really profitable and successful innovations have little in the way of
radically new technology, but instead utilise current technology more effectively in
solving customer problems.
Innovations can be classified by degree. A survey by Booz, Allen & Hamilton showed
that 90 per cent of new products are not new to the world (Table 7.1).1 Most are
adaptations of products that a company is currently selling: product improvements,
line extensions, penetration of new markets or the addition of new product lines.
Only 10 per cent are products that are fundamentally new to the market. It is these
latter types of innovation that make the newspaper headlines. But product improve-
ments and line extensions should not be despised as forms of innovation. They are
crucial ways to maintain the ‘freshness’ of established brands and consequently their
sales and profit performance. Product improvements, cost reductions and reposition-
ings keep brands profitable and up to date. Line extensions, new product lines and
penetrating new markets capitalise on and develop established brand strengths.
Table 7.1 emphasises another point. Even for those 10 per cent of innovations that
were fundamentally new, only 2 per cent were new products. Most successful
Table 7.1
Types of new %
product New to company
1 Product improvement 25
2 Cost reduction 10
3 Repositioning 5
4 Product line extension 25
5 New product line 15
6 Penetration of new market 10
New to world
1 New product 2
2 New old product 2
3 New market 2
4 New way of doing busines 4
Source: © Booz Allen Hamilton Inc. (1982) New Product

Management for the 1980s
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innovations – even the major ones – are new marketing concepts rather than new
products. Such concepts include the following:
■ New old products are new uses or applications for familiar products. These can be
extremely important. Examples are Arm & Hammer finding new uses for baking
soda, from baking to deodorising household equipment, toothpaste, etc.; and GSK
extending the application of Zantac from ulcers to heartburn.
■ New markets are new types of customer groups for an existing product or service.
For example, Lucozade was positioned for decades as a medicinal supplement for
the old and infirm. In the 1990s it was repositioned extremely successfully as a
sports drink for athletes.
■ New ways of doing business are innovative approaches to delivering current products
and services to customers. These are one of the most successful sources of innovation
today. In particular, finding new ways to distribute and support customers is an area
of great opportunity. For example, Direct Line transformed the car insurance market
in Europe by cutting out the brokers that absorbed 40 per cent of the insurance cost.
Dell did the same in personal computers, by selling direct to consumers rather than
through high-cost retail chains. The Internet and other developments in IT offer
major opportunities for innovating in how business is done.
Why innovate?
Today the pressures to innovate are greater than ever. Firms have always needed to
innovate in order to survive. Just as environmental change creates opportunities for
innovation, so it creates threats by making existing products obsolete. Change creates
new needs and provides the knowledge and means for better answers to them. The
accelerating pace of environmental change – new technologies, changing consumer
tastes and more competition – have all acted to shorten product life cycles. Businesses
that fail to update their products are sooner or later squeezed out of the market by
more innovative organisations.
Innovation is also necessary to achieve growth. Even if the firm maintains up-to-date
products, the markets they are in may mature or decline. A firm may eventually need
to push into new markets to find opportunities for growth (see Box 7.1). Innovation
is also crucial in most markets to maintain or enhance profit margins. The profits of
established products soon come under pressure as competitors emulate and more
price-sensitive markets are tapped. Product improvements and line extensions can
hold up margins, while truly innovative products can earn really substantial returns.
In recent years, innovation has been brought into sharp focus by the way some of the
world’s outstanding companies have turned to using an accelerated rate of new prod-
uct development as their major competitive weapon. In strategic terms, these can be
described as ‘third-generation competitors’. The first generation of postwar competi-
tion was based upon cost advantages. In particular, Japanese companies such as
Toyota, Casio and Honda built market shares by using initially low labour costs and
subsequently high productivity and scale economies to undercut their western
competitors. As companies sought to lower their cost structures, the best of these
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Why innovate?
Box 7.1 Microsoft enters the computer games market

By 2000 Microsoft, capitalised at almost $60 billion, was the world’s most valuable company. Its success was
due to its dominance of the personal computer software market, which had grown by over 20 per cent
annually over the previous 30 years. But by 2001 Microsoft had a problem, since personal computer sales
appeared to be decelerating rapidly. How could Microsoft maintain its rapid growth and defend its extraordinary
stock market valuation, pondered its founder Bill Gates, when the market it was in was maturing?
Gates’ solution was to enter new markets. One of the most exciting was the computer games market. In
2000 game consoles and software were worth $10 billion, more than the entire movie industry, and sales
were doubling every two years. The industry was dominated by the Japanese triumvirate of Sony, Nintendo
and Sega.
Microsoft recognised that the key to success was to attract the leading software developers to write games
for its new console, the Xbox. To do this it provided massively more memory for graphics than its Japanese
rivals. After intensive consumer research, other innovative features included offering four ports for handsets,
allowing four players to compete simultaneously rather than the traditional two. After watching how
consumers played they also offered a 9 ft cord, rather than the normal 6 ft connection, allowing players to
sit back in their preferred positions.
Noticing how Sony and Nintendo had damaged the launches of their recent new products, Playstation 2
and Dreamcast, because of product shortages, Microsoft put intensive efforts into designing its supply
chain. The Xbox was manufactured by Singapore-based Flextronics in three locations: South America,
Europe and Asia. By launch date in 2001 most observers agreed that Microsoft appeared to have done
everything right so far. It had sought to meet the needs of games designers, players, manufacturers and
distributors. The key would be execution and continued innovation which came in the form of Xbox Live, an
online gaming community. The introduction of this new service was made possible by the rapid growth of
broadband Internet access. In 2004 the Xbox share of games console sales rose from 25 per cent to
37 per cent. As of early 2005 the Xbox Live community had 1.4 million members who logged 92 million
hours playing a computer game launched two months previously. Microsoft charges about €50 per year as
a subscription to the service.
first-generation competitors added a second layer of competitor advantage – high

quality. This powerful combination of low cost and high quality pushed many tradi-
tional western competitors out of the mass markets into a retreat to small specialised
niche markets not targeted by their ambitious rivals.
It became conventional wisdom that companies had to choose between competing on
cost and competing on product differentiation. These were what Porter called the
‘generic strategies’ open to the business.2 But in the last decade a new breed of com-
petitors has shown that it was possible – indeed, increasingly essential – to be both
low cost and highly differentiated. These third-generation competitors, in addition to
low cost and high quality, offered customers the benefits of a stream of innovative
products and a wide variety to choose from. These new competitors such as Sony and
Honda in Japan; Cisco and Nike in the US, and Nokia and Swatch in Europe had both
cost structures that could match their low-cost rivals and speciality products which
could compete in innovation, design and performance with the best of the niche
players, such as Bang & Olufsen, Rolex, BMW and Porsche. Figure 7.1 illustrates the
dominance of these new high-productivity, highly differentiated competitors and the
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Niche Low cost,

players highly differentiated
High
Innovation/
differentiation
Low Commodity
businesses Low-cost competition
Figure 7.1 High cost Low cost

Evolution of Productivity
competitive strategy
vulnerability of the niche players and those relying only on cost. While the first gen-
eration of low-cost competitors dominated the traditional commodity marketers, the
new third-generation competitors threatened to dominate both the low-cost and the
niche players.
Honda is a good illustration of one of these new fast-track innovators.3 In the early
1980s its motorcycle business was being attacked by Yamaha. Honda launched its
counterattack with the war cry ‘Yamaha wo tsubusu’ (this roughly translates as ‘We
will crush, squash, butcher and slaughter Yamaha’). Rather than cut prices – a weak
weapon in an affluent style-oriented market – Honda chose innovation. Over the
next 18 months it launched 113 new models. This wave of new product launches
devastated Yamaha. First, Honda succeeded in making motorcycles a fashion buy,
where newness and freshness became key attributes to customers. Second, Honda was
able to incorporate the latest technology into its products, introducing four-valve
engines, composites, direct drive and other sophisticated features. Next to Honda
motorcycles, Yamaha’s looked old, out of date and unattractive. Demand for Yamaha
motorcycles collapsed.
Such third-generation competitors have achieved their breakthroughs by focusing on
speed. They have reorganised to cut dramatically the time taken to develop new
products, to manufacture and to distribute them. Managers in these companies have
discovered that being the fastest in developing new products and responding to cus-
tomer needs leads to the following important competitive advantages.
Leverage of fast-track innovators
Lower costs
If, for example, a car company can cut its model development time from six years to
three years, it will normally cut its development costs massively. It will absorb only
half the engineering time and tie up half the R & D facilities. Equally important, it
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Why innovate?
will also slash the overhead costs sucked into administering and controlling the proj-
ect. Consequently, it normally costs today’s rapid innovators only a fraction of the
amount of their slower-paced competitors to develop a new product.
More innovation
By freeing up R & D people and facilities and cutting costs, a company can increase
the productivity of its R & D spend to pursue more projects and get out more new
products for the same budget. This allows it continually to develop and fine-tune
its offerings.
Faster growth
With newer products and more choice to offer the market, fast-track innovators can
grow more rapidly.
Higher profits
Innovators are invariably more profitable because it costs them less to develop their
new products and because their products are fresher, more up to date and designed to
incorporate the latest technology, so they can obtain higher prices. The shorter prod-
uct life cycles become, the greater the profit premium on innovative products.
Brand strength
It is normally much easier to build a strong brand when it is the first into the market.
An innovative product finds it easier to establish a differential advantage because it is
a novel competitor. Late entrants have to prove that they are better than the innova-
tor, which is normally much harder because differences are smaller. Customers tend
to stay loyal when they are comfortable with the innovator, and it takes major
advantages in performance or price to shift them. A strong brand can also spin off
early line extensions to attract new market segments by using its existing brand name
to build confidence.
Reduced forecasting errors

If a company can halve the time it takes to develop a new product, it does not need
to guess about market requirements so far in advance. The shorter the gestation
period, the more reliable the prediction of market potential.
Flexibility and synergies

Innovators can position products across more segments of the market and through
more channels. This gives them greater market coverage and less vulnerability to the
fortunes of any one niche. They will normally also obtain economies of scope, shar-
ing components, technology and marketing facilities across the range. Finally, they
can use cash flows generated from strong markets to support aggressive moves into
new niches. For instance, Toyota’s technological and financial strength built upon its
position in the mass car market allows it to invest, transfer technology and cross-
subsidise its move into the sports car market – an opportunity not open to a defender
such as Aston Martin because it is a narrow single-niche competitor.
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Strategic opportunities for fast innovators
Non-innovative businesses are vulnerable to more dynamic competitors, to shorter

product life cycles and to the maturation of their markets. British companies often
try to meet these problems through the hazardous route of seeking acquisitions in
growth markets. Fast-track innovators can, however, pursue other strategic options
that more effectively exploit their core capabilities.
Creating new markets

By seeking to exploit fully their technical and marketing capabilities, innovators can
create completely new and often unexpected markets. Sony, pushing forward its skills
in electronics and miniaturisation, created a whole new industry of portable enter-
tainment with its Walkman, Playstation, Watchman and Bookman products.
Nintendo in hand-held electronic games and 3M with its Post-it notes also created
new markets from existing strengths.
Expanding current markets

Innovation can expand mature markets by attracting new users and new uses. Mars
expanded the whole ice-cream market in Europe when it introduced a new bar that
incorporated top-quality ice-cream into its Mars Bar brand of chocolate. In Japan,
Toto both dominates and expands the once mature bathroom fixtures market with a
stream of new products. In recent years these have included a special women’s sham-
poo sink, now accounting for 10 per cent of all sinks sold, and the Washlet – a toilet
with a warm water rinsing nozzle, a dryer and a heated seat. Recently, it has intro-
duced with great success an intelligent toilet that measures protein and sugar levels
in the user’s urine, together with blood pressure, temperature, pulse and weight; the
data is transferred to the home PC via a wireless network and processed by software
which produces time-series graphs and provides dietary advice!
Penetrating markets
Swatch became an outstanding success in the watch market through an innovative
concept. Before Swatch the market was divided into two broad segments: the low-
cost reliable Japanese products dominated by Seiko and Casio, and the prestigious
and very expensive Swiss watches. Rather than seeking to compete directly with
either of these competitor groups, Swatch aced both with a concept that was low
cost, high quality and differentiated through design (Figure 7.2). It transformed the
market by making the watch a fashion item. Like a fashion house, Swatch introduces,
with a wave of publicity, a stream of new watch designs each ‘season’. For many cus-
tomers, Swatch made the Japanese competitors look boring and the prestigious Swiss
watches look old-fashioned.
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Strategic opportunities for fast innovators
Rolex Swatch
Patek Phillipe
Omega
High
Innovation/
differentiation
Low
Seiko
Commodity watches Casio
Figure 7.2
High cost Low cost
Competitive
strategies in the Productivity
watch industry
Defending market share

A company that continually updates its line with a stream of small improvements
will generally maintain its edge better than one that seeks the major breakthrough.
General Motors’ Saturn project contrasts with the power of incremental innovation.
Concern about its lack of innovation and market share erosion led General Motors to
launch its radical Saturn plan. This aimed to revolutionise car design and manufac-
ture, enabling it to leapfrog its Japanese competitors. Unfortunately, Saturn took over
ten years to complete. During that period Toyota introduced 24 new models, each
building on its predecessor and incorporating the latest features. As a result, by the
time Saturn was launched, rather than being a breakthrough, it was already obsolete.
Repositioning the business

Rapid innovators can push the application of their core competences into new mar-
kets, which eventually shifts the weight of the business into a new industry. Here are
some examples:
■ GE, changing from a business focused on lighting and engines to financial services.
■ Canon, changing from a camera company to an office systems business.
■ Honda, changing from a manufacturer of small engines to motorcycles and cars.
■ Amazon.com, changing from a bookseller to an Internet retailing operation.
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Barriers to innovation
Successful innovators introduce many new products and achieve higher success rates.
Both tasks are related and neither is easy.
Why new products fail

There have been numerous studies of the success rates of new products. All of them
suggest that most new products fail to achieve a reasonable return for the business.
The failure rate is particularly high for consumer products. Typical studies suggest
failure rates of around 80 per cent for consumer products, 30 per cent for industrial
products and 20 per cent for new services.
Most researchers believe that failure rates are likely to continue to increase. Factors
causing this include the following:
■ Shortening product life cycles.
■ Rising costs of developing new products.
■ Increasing environmental and consumer legislation.
■ Global competition.
■ More new products.
■ Increasingly segmented markets.
■ Declining profitability of brand followers.
This high and rising failure rate has three implications for management. First, new
product development needs to be carefully planned. Second, since many, or most,
new product ideas will be weeded out before the commercialisation stage, manage-
ment needs to stimulate a large pool of potential new products from which a few
winners may emerge. Finally, as risk taking, and consequently the acceptance of new
product failures, is fundamental to the innovation process, management must look
for ways to reduce the cost of these failures. Fast response, minimising overheads and
controlling investment are the means of limiting these downside risks.
Considerable evidence exists on the causes of new product failure. None of the
reasons is surprising and most of the problems can be avoided, or at least substan-
tially reduced.
Development too slow

Managers greatly underestimate the penalty for slow development. Today, with core
technologies widely available and short product life cycles, speed to market is crucial.
Companies that are slow to innovate usually end up with a high product develop-
ment cost and achieve lower prices. Late entrants rarely obtain a significant market
share or achieve scale economies in manufacture or marketing.
Speed to market is generally more important than fine tuning cost and quality. A
study by McKinsey suggests launching a product six months behind schedule will
reduce lifetime profits by one-third. In contrast, spending 10 per cent over budget on
development will trim profits by only 2 per cent (Table 7.2).
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Barriers to innovation
Table 7.2
Decrease in lifetime profit (%)
Impact of
development
Introduced 6 months late 31.5
problems on
Quality problems reducing prices by 10% 14.9
profitability
Product costs exceeded by 10% 3.8
Development programme cost overrun by 10% 2.3
Source: Adapted and reproduced from Don G. Reinertsen, ‘The search for new product killers’, Electronic Business,
July 1983. Copyright © 2001 Cahness Business Information
Lack of differential advantage

Products fail when customers do not perceive them as better value than those they
are currently using. This may be due to inadequate functional performance.
Alternatively, it may be due to poor competitive positioning – customers do not
perceive the real values possessed by the product. The first problem is usually identifi-
able in blind product-use tests; the second through consumer research.
Poor planning
New product development is so complex, fast moving and competitive that mistakes
will inevitably occur if management do not put in appropriate systems. Poor planning
results in markets not being researched and segmented, targets and budgets not being
set and monitored, positioning strategies not being tested, and product launches being
inadequately implemented. Without proper planning, the result is invariably failure.
No management enthusiasm
Lack of management enthusiasm is another product killer. Management is often ori-
ented to past winners and sees new projects as taking resources away from the core
business. IBM’s historical strength in mainframe computers constrained manage-
ment’s commitment to the new fast-moving, lower-margin mini- and
micro-computer markets (see Box 7.2). Many of today’s established retailers are reluc-
tant to adopt the Internet because they know its development as a shopping medium
will cannibalise their existing branches. Short-termism is another factor handicap-
ping many western companies. Where management incentives and focus are on
current profit performance, new product development efforts are often sacrificed to
boost short-term profits.
Box 7.2 Incremental and radical innovations

Harvard’s Clayton Christensen in his book The Innovator’s Dilemma (Harvard Business School, 1997) made
the distinction between sustaining and disruptive technologies. Sustaining technologies are innovations
that incrementally improve performance along dimensions that mainstream customers value. For example,
new generations of Intel chips or Microsoft Office result in products that are faster, more powerful or
possess added features. Market leaders are usually skilled at sustaining technologies.
Disruptive technologies are innovations that initially produce worse performance. For example, the PC
could not match the mainframe for speed, power or features. As a result, market leaders usually fail to take
▼
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these technologies seriously enough. They have little appeal to their mainstream customers, they offer
lower margins and the potential market looks small. But disruptive technologies do appeal to certain
different customers because, while they are less powerful, they are typically cheaper, simpler, smaller and
convenient. Almost invariably disruptive technologies are developed by newcomers rather than current
market leaders.
Disruptive technologies are a major threat to market leaders because new technology progresses rapidly.
For example, PC technology advanced fast, allowing increasing substitution of mainframes. Before they
know it yesterday’s market leaders are being usurped by these newcomers attacking their mainstream
markets with second- and third-generation disruptive technology that offers sufficient performance at
dramatically lower prices. Examples of disruptive technology include the PC, the Internet, memory sticks, ink
jet printers and, in earlier years, discount airlines and supermarkets. The concept of disruptive technology
describes certain new products and services that are easily underestimated because of their performance
limitations. But eventually their performance can dramatically improve, facilitating their shift from a niche
appeal to broad market acceptance. Christensen has further developed his ideas with Michael Raynor to
produce a framework for engineering successful disruptions (The Innovator’s Solution, Harvard Business
School, 2003).
Organising for innovation
An innovative organisation is one that continually seeks new ways to improve what
it offers customers, rapidly processes these ideas and effectively implements the best
of them. In a very small firm, all employees naturally feel close to customers and
know that their livelihoods depend upon satisfying them. As the firm grows, this
clarity is lost. Senior managers give up day-to-day contact with customers and front-
line employees. Increasing organisational complexity means that issues of internal
administration and control take precedence over the problems of the customer.
Innovation is curtailed because inputs take over from outputs. Larger organisations
are split into functions and often operate at different sites. Knowledge about cus-
tomers’ needs and how they might be resolved is no longer unified. Sales,
manufacturing and R & D staff report to separate departmental heads. Functions
develop their own goals, often jealously guard their own territories and expand their
own cultures. Communicating information, priorities and direction then becomes a
major problem. Not surprisingly, in many large organisations innovation languishes.
How this occurs is illustrated in Table 7.3. The company shown is a large engineering
business that supplies the aerospace and motor vehicles industries.4 It is organised on
conventional matrix lines. It had become concerned about its slowness in developing
new products. For example, it took nine months to respond to a simple customer
request for a new product proposal. On investigation, it was discovered that only for
7 per cent of the time had work on the proposal actually been taking place. For 254
of the 273 days it was in the company, the project had been stalled, waiting for infor-
mation to be moved across departments and sites, and waiting for busy executives
and committees to study, appraise and approve the steps that had been taken. Many
companies are now seeking to cut development time by more effective teamwork
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Table 7.3
Time and resources Total days inside the company 273
to complete a Total value-added days 19
typical new product Number of staff adding value 36
project Departments involved 10
Back-pedalling among departments 9
Approvals: 31
Functional 21
Management 10
Committee approvals 15
Transfers between sites 8
among departments, or ‘simultaneous product development’. For example, Ford took

14 weeks from its development cycle by simply getting engineering and finance
departments to review designs simultaneously rather than sequentially.
Other companies have found similar figures – generally under 10 per cent of the time
developing a new product is adding value. Clearly, ways of organising to run a com-
plex ongoing business generally work badly when it comes to innovation. A key for
management today is to develop different and special organisational arrangements
for innovation.
Vision and objectives

Initially, top management must provide the vision and priority for innovation.
Innovation needs to be placed alongside profits as an essential organisational goal.
An ‘innovation audit’ is a good place to start. This is a critical assessment of the firm’s
innovation record, the internal obstacles to innovation and how performance can be
enhanced. The first step should be a benchmarking exercise comparing the firm’s
innovation record with those of other leading businesses.
A leading European pharmaceutical company benchmarked its NPD performance
against Merck, the industry leader. While it took twelve years to move a new drug
through the research, development and registration process, it discovered that Merck
did it in seven. As a result, Merck had over 50 per cent of its revenues generated by
products launched in the last five years (versus 13 per cent); Merck had faster growth,
higher profit margins (42 per cent versus 17 per cent) and four times the market share.
The second stage of the audit is to identify the obstacles to innovation. For the phar-
maceutical company, the problems were identified as a lack of urgency among
managers in looking for new products and in progressing them rapidly. Second, the
NPD process was badly structured, with value-adding work being continuously held
up for months at a time waiting for departmental and executive inputs and reviews.
Finally, communications were inadequate. Many people were stalling projects simply
because they lacked the information to understand the issues.
The final stage of the audit is to recommend what should be done. Quantitative
innovation objectives need to be set on both the number of new products to be pur-
sued and the time to get them to the market. The necessary organisation and cultural
changes need to be pursued with vigour and urgency.
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People and skills

Innovation is based upon knowledge. Organisations that win in innovating have
people who know more than their competitors about what customers want and
about the technological solutions available. An innovative organisation is a learning
organisation. Unless the business is investing in its people to keep them at the fore-
front of understanding environmental change and the potential of new technologies,
it will lack the core capabilities to innovate.
Making the company’s information easily accessible to all personnel is also crucial. If
people are to contribute fully, information cannot be kept locked behind functional
or hierarchical doors. Technical people need to know about customer needs and the
market and financial performance and prospects of their products. Salespeople
require information about technical developments, manufacturing problems and
new areas the company is exploring.
Staff also need incentives to innovate. If managers are evaluated on today’s sales and
profits, they are not going to put effort into tomorrow’s businesses. This is why compa-
nies such as Hewlett-Packard, 3M and Rubbermaid link the pay of key executives to the
number of new products they introduce. Contribution to innovation, the future of the
business, needs to be explicitly built into the firm’s incentive and evaluation systems.
Customer-focused innovation
Managers must stress that the objective of innovation is to produce a delighted cus-
tomer. Customer involvement and feedback should be continual priorities throughout
the project. For radical innovation an eye for customers is even more essential. For
example, when the Sinclair C5 was designed as a low-cost form of personal transport
powered by pedals and a washing-machine motor, no account was taken of customer
demand for the product. Customers were expected to ‘drive’ a very low-profile, slow-
moving ‘vehicle’ on the road which would be frequently invisible to regular forms of
motor transport. While it was an innovative design, potential customers viewed the
product as impractical and dangerous. Remaining examples are mostly found in trans-
port museums. Paradoxically, the really big successes often succeed with quite
different customers from those they were intended to serve. Often they create markets
that nobody before even imagined. For example, no one knew they needed an office
copier before the first Xerox in 1960; five years later no business could imagine being
without one. No one could see a use for the Walkman when Sony first researched it;
now few homes are without one. Similarly, 3M developed both an adhesive tape and
later a low-retention glue for the industrial market. They were never taken up by
industry, but instead developed huge markets as Scotch tape and Post-it notes in
households and offices. Upjohn’s research into heart drugs produced Regain – a prod-
uct that made millions when it was launched in 1990 as a hair restorer! For its first
decade, the Internet was almost solely used by academic researchers. No one envisaged
that a huge business and consumer market would emerge.
Even when the market focus is broadly correct, forecasts for genuinely new products
can be hopelessly wrong. In 1979 Ken Olson, the CEO of Digital Equipment
Corporation, a leading manufacturer of ‘mini-computers’, stated that ‘There is no
reason anyone would want a computer in their home’. When the first jets started to
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fly, the market research suggested that there were not enough passengers from the
transatlantic liners they were designed to replace. Five years later jets were carrying
100 times more passengers each year than had ever sailed the Atlantic.
If the innovator has tunnel vision – wanting to stick to areas with which it is familiar
– then it may succeed in only creating an opportunity for a competitor. Innovators
need to expect a new product to have potential outside its original target market.
They need to anticipate this by spending time outside: in the market, with different
customers, with salespeople, looking and listening. Interest from unexpected cus-
tomers needs to be followed up and, if possible, exploited.
Autonomous teams, parallel processing

Innovation must take place outside the conventional organisation. The task and
objectives of running an existing business are quite different from those of starting a
new one. The former focuses on efficiency and control; the latter on risk taking and
creativity. The organisation that is right for efficiently producing the millionth prod-
uct or serving the millionth customer has to be different from that doing something
for the first time. Ongoing organisations are too slow and unfocused for innovation.
These defects occur because conventional organisations work in series rather than in
parallel. Traditionally, new products start with either the R & D or marketing depart-
ment getting a bright idea. After some months or years in research, the concept is
then handed over to the engineering function, where a product is designed. After
they have finished, it is passed to production for manufacture, before finally it goes
over to sales to sell. At each stage there is likely to be delay, disagreement and cycle-
backs among departments (see again Table 7.3). The production people send the
design back to engineering because they say it cannot be produced at a reasonable
cost; the engineers then spend more time redesigning the product. When the sales-
people eventually get the product, they are disillusioned because they find it is too
late and because it does not offer customers any new benefits. Each of the functional
departments blames the others for incompetence.
Such critical problems can be resolved only by taking responsibility for innovation
out of the mainstream organisation and placing it in the hands of a special team
dedicated to the project. Most top companies now see project teams as the essential
way to make innovation work. The team should consist of experienced people from
R & D, marketing, engineering, production and sales. Each should share total respon-
sibility for the success of the project. Their first task is to map out the value-adding
tasks and seek to timetable the reviews, paperwork and approval processes so that
they do not block the real work. At each stage from research, through design to mar-
keting, the team’s multifunctional skills are used. The key stages of the development
process are then pursued in parallel rather than sequentially, collapsing time and
eliminating much of the organisational conflict.
Systems
The planning and control systems of the firm need to be changed if innovation and
an entrepreneurial climate are to be fostered. First, conventional return-on-
investment criteria will choke off innovation if they are applied to new products.
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Even the best new products rarely show an adequate ROI until they have been on the
market for several years. Second, systems can be used to influence attitudes. For
example, some innovative companies have an annual high-level product review
meeting. This reviews the firm’s portfolio and aims to slough off weak and obsolete
products to make room for new products.
Budget meetings can also be refocused. Currently such meetings concentrate on neg-
ative variances and so orientate managers to problems rather than opportunities.
Instead, agendas should allocate time to identify activities that have exceeded budget
and encourage managers to explore how such opportunities could be exploited.
Finally, the annual strategic planning cycle should incorporate a thorough review of
innovation performance. It should ask whether objectives are being met and whether
the business is at the competitive forefront.
Integration
Innovation needs to be separate, but when it is complete a project must be integrated
into the mainstream organisation to ensure that it receives adequate resources.
Organisational researchers have shown that this fine balance between the needs for
differentiation and eventual integration is facilitated by three types of role within
the business.5
First, an organisation needs product champions who fight for the innovation and push
it forward through the many obstacles that invariably arise. The product champions
will normally belong to the project team. But an innovation also needs a sponsor in
the mainstream organisation who will lend authority, encouragement and resources
to enable the product champions to carry the project closer to commercialisation.
These are normally middle to senior managers with a respected track record. Finally,
an innovation needs an orchestrator who can handle the politics of change and
obtain the backing of the organisation. The orchestrator will be a member of top
management – often the chief executive.
Ultimately, innovation requires commitment throughout the organisation.
Horizontal or functional support is integrated through the new product team.
Vertical or hierarchical commitment is achieved through the different roles of prod-
uct champions, sponsors and orchestrators.
New product development process
The cross-functional new product team has the task of successfully channelling ideas
through the NPD process as shown in Figure 7.3. As many as possible of these stages
will be undertaken in parallel to speed up the process. The exact process varies some-
what between industries. For example, test marketing is not usually required for
industrial products. In other industries, additional stages are involved. For instance,
in pharmaceuticals, clinical trials and registration requirements are critical steps.
More companies are now structuring their new product development process to
accelerate results and control costs. 3M, one of the most consistently successful com-
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Corporate purposes
Capability profile Corporate strategy Definition of scope
Growth direction
Ideas
Market research Exploration Strategic viability

Checklists and analysis Corporate fit
Concept
Consumer testing Market advantage
testing
Investment, cost Business

and sales analyses Commercial potential
analysis
Product tests
Pack tests Brand Marketing mix
Name tests development
Pricing research
Advertising tests
Implementation Go/no go decision
Test market
National launch
Figure 7.3 Retail audits

Consumer panels Control
The new product
Consumer surveys
development
process
panies at innovating, uses the stage-gate system.6 At each of the main stages in the
new product development process, the project team has to present specific evidence
and results to move on to the next stage. For example, to move from the ‘exploration
and analysis’ stage to ‘brand development’, the project leader has to provide convinc-
ing research results covering consumer attitudes, competitive analysis and technical
performance. The gatekeepers are the senior managers who critically review the proj-
ect at each stage and decide whether to go, hold, recycle or kill it. Such disciplined
systems have a number of advantages: the project teams have clear goals and clear
responsibilities, work is performance oriented and bureaucracy is minimised.
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Corporate strategy and innovation

The firm should have a corporate strategy setting out its mission, core capabilities
and the product and market areas it seeks to operate in. This should indicate the
direction for researching and developing new ideas. The team will be oriented
towards projects that are consistent with the overall strategy of the organisation. The
intensity of the innovation effort will be influenced by the ambitions of top manage-
ment. For example, 3M expects each of its divisions to have a minimum of 25 per
cent of its profits from products introduced in the last five years. Such a goal dictates
that substantial managerial and financial resources will be devoted to innovation.
New product ideas

The process starts with generating ideas for new products. Two principles influence
the idea generation phase. First, the business needs to have lots of ideas. A study by
Booz, Allen & Hamilton found that it took 58 new product ideas to turn out one
winner. In some industries the odds are even bigger. In the pharmaceutical industry it
is currently estimated that over 10,000 molecules have to be investigated for every
successful new product introduction. Second, management has to recognise that not
all successful new products are ‘breakthroughs’. Instead many are the small product
improvements and line extensions that, while apparently unremarkable, over time
are crucial to keeping the business moving forward.
Employees
Many new ideas originate from employees. Even new products licensed or acquired
have to be identified and championed internally. Ideas can come from anywhere in
the organisation, but those of front-line employees – people who make the products
and sell them to customers – are particularly valuable, since they are most knowl-
edgeable about the technology and the needs of the market. In principle, large
organisations employing thousands of people should have a major asset in this idea
base. Some large companies such as 3M, GE and Toyota have tapped this potential to
great effect. Toyota, for example, receives over 2 million ideas a year from employees,
about 35 per head, and claims to implement about 85 per cent of them. But most
large companies have not seriously tried to incentivise and reward such a massive
drive to capitalise on the knowledge and creativity of their employees.
Senior managers should design systems to boost permanently the flow of ideas from
employees. They should set targets for each department – say, five ideas per employee
– and provide substantial rewards for implementable proposals.
Customers
Customers are invariably the best source of ideas. Innovations have commercial value
only if they meet the needs of customers better than current products. Innovative
customers – those individuals or organisations that are at the forefront in buying new
products or applying new ideas – are the most valuable sources. Such customers see
problems and opportunities well ahead of typical buyers and are generally willing to
talk with potential suppliers about their requirements and how they might be met.
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Research and development

Scientists play a pivotal role in high-tech businesses. Asking customers is not
enough. Customers tend to be myopic – they cannot express needs for products and
benefits they have never envisaged. It is important to allow scientists to pursue
promising research directions.7 The skill is paralleling this technical thrust with
constant probing and testing of potential customers to get feedback about possible
uses and improvements. Without a close and early integration of technical research
with market soundings, investments in R & D can be thrown away. All too often it
is the imitator, rather than the inventor, who sees the real market opportunities in
technical advances.
Box 7.3 Organising Innovation at Fonterra

Fonterra is a leading multinational dairy company, owned by 13,000 New Zealand dairy farmers and the
world’s largest exporter of dairy products. Scientists and marketers may not seem the most obvious
business collaborators, but dairy giant Fonterra has brought the two together to open new doors in
customer-driven innovation.
Fonterra, the largest dairy-specific innovator in the world, has transformed the way it delivers value to its
customers and partners by bringing its marketing and research people under the same roof.
This new grouping in Fonterra’s ingredient business, known as Marketing and Innovation, has developed the
Innovation Pipeline. The pipeline significantly increases Marketing and Innovation’s ability to respond to
market demand.
The pipeline is designed to capture as many new innovation ideas as possible, then compare their relative
merits. Each idea is developed into a concept. If the concept appears worthy, a feasibility study and a
business plan follow. The best ideas become new products, productivity improvements or new businesses.
‘This is an innovative way of working the full “cow-to-customer” supply chain, allowing us to deliver
customer-led innovation,’ says Fonterra’s Director of Marketing and Innovation Bob Major.
‘We can respond quickly to customer demand. Fonterra then selectively patents the successful inventions,
leaving the pipeline to get on with new projects.’
Creating the Marketing and Innovation group has involved the physical relocation of Fonterra’s business-to-
business marketers to the company’s research and development campus in Palmerston North, New
Zealand. This is now the largest dairy-specific innovation centre in the world.
‘We have recognised that everyone is a winner in this strategy. It will mean Fonterra can create new commercial
options for our customers and partners, as well as improving our own business performance,’ Major says.
‘And, most importantly, the customer demands are met quickly with quality, researched and proven products.’
An early success story for the pipeline has been a yoghurt sold in Woolworths supermarkets in South Africa.
The yoghurt contains probiotics first isolated by Fonterra’s research and development team. Probiotics are
lactic acid bacteria believed to boost the immune system when eaten regularly.
The yoghurt is manufactured under licence and has proven to be the most successful yoghurt ever sold by
the supermarket chain.
The Innovation Pipeline’s ‘rapid response team’ also recently produced, over three months, 42 prototypes of
ingredients for nutritional products in the sports food market.
Source: http://www.marketnewzealand.com/MNZ/MarketIntelligence/SuccessContent.aspx?SectionID=4607&ContentID=11988
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Competitors
Competitors can be a source of new ideas. Companies such as Canon, Xerox,
Hewlett-Packard and Ford use competitor benchmarking – systematically comparing
their products with the best competitor to look for potential advances.
Distributors
Dealers are particularly useful sources of ideas. They know both the ultimate cus-
tomer and the competitors. Managers can turn a distributor into a valuable ally and
powerful source of new ideas by listening to its problems and suggestions.
Creativity techniques
A variety of techniques has been developed by psychologists and market researchers
to help individuals and groups generate creative ideas. These include brainstorming,
synectics and morphological analysis.8 Such methods can play an important role in
inspiring people to release their latent capabilities for innovation.
Outside sources
Given the speed with which markets and technologies change, successful companies
have had to break out of their ‘not invented here’ syndrome. To accelerate the rate of
innovation, even companies with great track records – Merck, IBM, Apple, 3M and
GE – carry a rising proportion of products invented by others. These product ideas are
brought in or licensed from other companies, research agencies, universities and con-
sultants. Top companies are dramatically extending their networks of relationships
and strategic alliances to pull in new ideas and capabilities.
Screening ideas
The objective of the idea-generating process is to maximise the number of sugges-
tions. The purpose of the screening stage is to select those few that have the potential
to be winners. This is a fundamental strategic decision – with limited resources, the
business must focus its efforts. Potential success depends upon three factors: the
idea’s compatibility with the firm’s corporate strategy, the potential demand for the
product, and the firm’s capability to exploit the product opportunity.
Table 7.4 shows a screening technique that can be used to assess the attractiveness of
ideas at an early stage. The first column lists three categories of factors determining
potential success. The next column identifies the relative weights that management
attaches to each of these components. Finally, each idea is rated on a ten-point scale
(1 = bad to 10 = excellent) by managers and the total weighted score for each idea is
obtained. The highest potential score is 100 per cent, and projects scoring below a
cut-off of, say, 75 are candidates for elimination. Such techniques are used not to
make decisions, but rather to assist a selection process.
Screening is a tricky problem because it involves balancing between two types of
error. Type I errors result from not eliminating a product idea that subsequently fails.
Type II errors result from eliminating ideas that would have been successful. The
tougher the screening process, the fewer type I errors will occur but with the increas-
ing probability of type II errors. Both IBM and Kodak committed type II errors when
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Table 7.4
Factors Ideas
New product idea
screening form Importance weight A B C
1 Corporate strategy fit (30)

Consistency with objectives 20 10 7 7
Fit to product/market goals 10 10 6 7
2 Demand potential (40)
Customer need 10 8 8 4
Market size 6 8 7 3
Market growth 6 6 5 3
Potential share 6 6 5 3
Profitability 6 5 6 4
Sociopolitical risk 6 8 6 4
3 Fit to capabilities (30)
Technical 5 9 6 4
Marketing 5 9 6 5
Distribution 5 8 5 6
Production 5 8 7 5
Finance 5 7 7 7
People 5 8 6 7
Weighted total score 100 82.4 63.9 52.2
Note: Over 85: excellent ideas; 70–84: of substantial interest; 55–69: worth exploring; below 54: of low
priority
they rejected Chester Carlson’s offer of the patents for his new copying machine.
Millions were made instead by Rank, which took up the offer. The costs of type II
errors are underestimated, largely because most companies never discover the value
of the ideas they throw away.
Concept development
An idea that gets through the initial screening process must be developed as a con-
sumer proposition and tested against potential customers. Customers do not buy
products; they buy solutions to their problems. Consequently, it is important to dis-
tinguish between a product idea and its positioning concept. The product idea is the
new physical good or functional service that is being considered by the company.
The positioning concept refers to the choice of target market segment and benefit
proposition. This distinction is crucial because most new products can have very dif-
ferent positioning strategies.
Even a simple product idea such as a new brand of painkiller could have multiple
positioning concepts. The target markets chosen could be adults or children, people
with mild or severe illnesses, or cold or headache sufferers. The reason to buy might
be that compared to competitors it is more efficient, faster, longer acting or easier to
swallow, or has fewer side effects.
The dilemmas are equally great in industrial markets. IBM initially saw the computer
as having a narrow scientific appeal. Its president, Thomas Watson, believed that a
single computer could solve all the big scientific problems in the world. It was only
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when conceived as a business machine that its true potential was realised. The initial
concept of the laser was for military use. The real opportunity, however, was position-
ing it as a key component in technologies as diverse as compact disc players,
communications and medical surgery.
Not surprisingly, many of the biggest winners are not innovative products at all; rather
they are innovative concepts. Here, managers take an existing product and find a new
or better positioning concept for it. Acetaminophen was sold by a number of compa-
nies as a substitute painkiller for people who could not take aspirin. It was not
particularly successful until Johnson & Johnson launched the Tylenol brand and posi-
tioned Acetaminophen as a general replacement for aspirin: a safer, better painkiller.
Testing alternative positioning concepts for the product is therefore essential in the
NPD process. It involves presenting alternative benefit propositions to different
potential target customers. Managers then research the following:
■ Communicability. Do customers understand the benefit being offered?
■ Believability. Do they believe that the product has the benefits claimed?
■ Need. Do they have a strong perceived need for the benefit offered?
■ Need gap. If there is a need, is it perceived as already being satisfied by existing

providers?
■ Perceived value. Do customers see it as offering value at the price being considered?
■ Usage. How would they use it and how often?
Business analysis
So far in the NPD process, the firm’s investments and costs have been limited, but if
the project is to go ahead substantial investments will now have to be made in devel-
oping the product and the infrastructure to manufacture and market it. The costs of
failure now threaten to become important to the firm. At the business analysis stage,
the product champions need to present a business case to the project’s sponsors.
Management will want to base their go-ahead decision on four factors:
■ Their faith in the profit projections put to them.
■ The assessments of the commercial risks involved.
■ The investment required.
■ Other strategic issues involved in the decision.
The business case will draw in all the functional skills of the team. The sales forecast
will be built up from the proposed marketing strategy and a detailed understanding
of the market. The costs and investment estimates will be developed from an under-
standing of the manufacturing, marketing and distribution tasks required. These
projections will then be built up into a cash flow statement covering perhaps the first
ten years in the product’s life. Since these projections are highly uncertain, it is valu-
able to produce optimistic and pessimistic as well as a median forecast of cash flows.
The expected net present cash flow of the project is:
n
ENPVi = Σ (1–––––––
i=1
CP
i i
+ r) i
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where
ENPVi = expected net present value of project in year i
Ci = net cash flow generated in year i
r = firm’s cost of capital
Pi = probability estimate attached to the cash flow in year i.
A product with a positive expected net present value should generate wealth for
shareholders and be in their interests.
However, it is a mistake to base the decision purely on a financial criterion. The prob-
lems with this decision rule are that it ignores the interests of stakeholders other than
shareholders and that it fails to capture some broader strategic issues facing the firm.
For example, a company may find that the final financial return on a prospective
product does not reach its target rate of return. Despite its unprofitability, such a
product may be the key to maintaining a presence in the market. Failure to develop a
new product may permanently close the option of being a major player in the indus-
try. A new product may not be in the narrow interests of shareholders, but it may
preserve the jobs of long-term valuable employees and demonstrate the firm’s com-
mitment to the community.
Decisions whether to proceed with the new product therefore require judgement
based on both quantitative and qualitative information.9
Brand development
If a product concept satisfactorily passes through the business analysis gate, it will
move into the product and brand development phase. The first objective here is to
design and develop a product prototype that matches the positioning concept and
which can be mass-produced and delivered in an efficient way. The second task is to
develop the elements of the marketing mix – name, pack, price, distribution and pro-
motion – that will augment the physical product and communicate its value to the
target market.
The brand development stage depends upon close and sympathetic co-operation
between the different functional areas of the business. It is the project team’s task to
facilitate this partnership. The development experts will be leading the design of the
product; manufacturing will be seeking to achieve low-cost production; marketing
and distribution will be aiming at optimising the marketing mix, sales and logistics
plans. The brand development stage should be characterised by a series of design
decisions rapidly tested to achieve feedback from the market. Product tests with
potential customers should carefully evaluate functional performance, efficiency,
safety and apparent benefit to the customers. For consumer goods, pack tests should
check ease of use, performance and the image presented of the product. Name tests
should measure memorability and perception of the brand that is evoked. Where
advertising is employed, research should pre-test the presentation for its communica-
tions effectiveness. Finally, pricing research is necessary to determine what customers
would be willing to pay for the product with the values it is designed to offer. Product
development and testing agencies have developed a variety of scientifically based
techniques for pre-testing the elements of the product and the marketing mix.10
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Implementation
If the pre-tests are encouraging, the team will push for implementation and launch of
the project. The exact alternatives depend on whether it is a consumer or industrial
product. However, broadly the management at this stage has three alternatives – test
market, regional roll-out or national launch.
Test marketing
Pre-tests during the brand development stage should isolate major problems.
However, pre-tests can be blunt and even biased measures because they do not take
place in a realistic market-place. Pre-tests ask customers if they would buy the prod-
uct. In practice, with aggressive competition, the perceived risks of changing
suppliers and other constraints, the decision might be different from that suggested
in the pre-test. Test marketing involves launching the product in one or more parts of
the country and determining how the product would fare in realistic conditions.
The objectives of the test market are three. First, the test market aims to develop a
more reliable forecast of sales. If in tests a new brand does not achieve a specified
target market share, it can be dropped before the major investment in a national
launch is undertaken. Second, the test market can be used to evaluate alternative
marketing plans. For example, in one area a high promotional budget can be put
behind the launch, while in another a more modest investment might be made. This
allows an estimate of the promotional elasticity of the product. Third, the test may
identify unsuspected problems. These may be problems of obtaining distribution or
unexpected reactions from customers. By identifying such problems early, the com-
pany can fix them before the real national launch.
Test marketing is a help, but it is no panacea. One increasingly important drawback is
that it can delay the launch for a year or more. During this time, competitors can
learn about the project, develop defensive strategies and occasionally even be first
into the market-place. Further, no single area will exactly mirror the country as a
whole. Specific factors in the area, such as local competition or the weather, can pro-
duce misleading results and forecasts. Finally, markets change over time. While the
product might be launched effectively in the test this year, next year circumstances
might have changed: new competitive products might have been launched or cus-
tomer fashion and tastes may have moved on. Test marketing reduces the
uncertainties, but does not eliminate them.
Regional roll-outs
Many products are launched on a sequential regional roll-out basis. This has the
advantage that the initial regions are effectively test markets that can be used to
fine-tune the marketing programme. In addition, it allows production capacity to be
built up steadily. For industrial goods and prescription pharmaceuticals, the nature of
the market makes conventional test markets or regional roll-outs more difficult to
apply. Instead products are launched first at innovative customers. The reactions of
these opinion leaders will strongly influence whether the product is adopted by the
rest of the market.
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Customer adoption process
National launch
If the company aims to pre-empt competition, then, providing it has the resources, it
may move swiftly to a national or even international launch. There are many advan-
tages in being first into the market. Getting in first makes it easier to gain a
differential advantage. Followers have the more difficult job of showing that they are
better. On average, the pioneer maintains a market share two-thirds higher than the
next follower and more than double a later entrant.11 These figures apply in both
consumer and industrial markets.
When a radically new product is launched on to the market it should not generally
use a mass-market approach – distributing it everywhere and assuming anyone might
be a buyer. Again careful customer targeting is essential if resources are not to be
wasted. This section looks at four questions:
■ How do new products build acceptance among consumers?

■ How does the market develop?
■ What are the characteristics of innovative customers?
■ What determines whether an innovation will succeed quickly and easily?
Product adoption process
Before customers can buy a new product, they must learn about it. This learning is
called the adoption process and is commonly viewed as consisting of five stages
(Figure 7.4).
Awareness Advertising, PR
Advertising, PR
Interest
Personal selling
Personal influences: friends

Evaluation and relatives, advertising, PR
Personal selling
Trial Personal influences
Sales promotion
Figure 7.4
Product adoption
process and Advertising, PR
Adoption Personal influences
communication
tools
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■ Awareness. First, the innovator has to create awareness of the product. Advertising
and PR are common tools for achieving awareness.
■ Interest. Next, customers need to be stimulated to seek information about the
product’s uses, features and advantages.
■ Evaluation. Customers consider whether the product will meet their particular
needs. Personal sources – friends, colleagues, opinion leaders – become important
influences at this stage.
■ Trial. The customer tries the product for the first time and decides whether to
adopt it.
■ Adoption. The customer decides to make regular use of the product.
In targeting a market segment, the innovator needs to consider at what stage of the
adoption process it is. Each stage requires a different media and message emphasis.
Public relations and advertising can be effective at generating awareness and interest.
Personal selling, sales promotion and sampling can be better for creating evaluation
in trial. The launch plan needs a careful sequencing of promotional tools to acceler-
ate the adoption process.
Market diffusion process

The adoption process describes the way an individual customer learns about an inno-
vation. The diffusion process describes how an innovation spreads through a market.
Knowledge of this process can assist management in identifying target customers.
The major point is that a market develops not uniformly, but by drawing distinctive
new segments into it. It is common to identify five segments distinguished by the
time they take to adopt the product (Figure 7.5).
■ Innovators. These are the first to adopt the new product. Technically, innovators
are defined as the first 2.5 per cent of customers. Innovators are venturesome –
they are willing to take risks in trying new ideas. They are important first as the
initial target segment for an innovative product. Second, they personally influence
later adopters. A new product that fails to win the esteem of these innovators will
find it difficult subsequently to penetrate the mass market.
2.5%
Innovators
13.5% 34% 34% 16%

Early adopters Early majority Late majority Laggards
Figure 7.5
Adopter categories
in the diffusion Time of adoption of innovations
process
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■ Early adopters. These are the next segment to adopt the product, technically 13.5
per cent of the market. Early adopters tend to be opinion leaders and, since per-
sonal influence plays a large role in adoption of new products, they are
particularly important.
■ Early majority. The next group, 34 per cent, completes the first half of the potential
market for the innovation. The early majority are deliberate – they adopt new
ideas before the average person, although they are rarely leaders.
■ Late majority. These are more sceptical about new products and harder to persuade.
Eventually they adopt because of economic necessity or social pressure.
■ Laggards. The last 16 per cent of the market are the most reluctant, and the most
economically incapable of adopting the innovation. These are described as tradition
bound – they are suspicious of changes, mix with other tradition-bound people, and
adopt the innovation only when it takes on a measure of tradition itself.
For the innovating company, this diffusion process has several implications. First, it has
to target the appropriate segment. Promoting to the ‘average’ consumer will be ineffec-
tive unless the innovators and early adopters have first experienced the product and are
willing to recommend it. Second, the marketing mix will need to change radically as
the product moves through the segments. Innovators, for example, normally use differ-
ent media, have lower price sensitivity and buy through different distribution channels
than later adopters. Consequently, the company will need to employ different commu-
nication strategies, charge lower prices, modify the product line and change
distribution channels as the market evolves and as it targets different groups.
Innovator characteristics
It would be ideal if managers could have general descriptions of the demographic,
socioeconomic and media characteristics of these different innovator segments.
Unfortunately, although perhaps not surprisingly, such generalisations are hazardous.
A person or firm that is an innovator in one product area may easily be a laggard in
another. An individual may want the latest hi-fi, but be indifferent and conservative
concerning clothes or cars. The marketing manager therefore has to try and identify
the innovators in a particular market. The essential question is: which customers will
perceive the greatest value from the new product? In industrial markets this value
will predominantly be economic. For example, a new labour-saving machine will
have the highest value to customers in areas with high labour cost, so that they will
be more likely to be innovators here. For a new cardiovascular drug, the value will be
perceived first by hospital specialists dealing continually with patients with acute
heart problems. Family doctors will be later adopters and will rely on the advice of
the specialists. For individual customers, image plays an important role and innova-
tors may be those with higher disposable incomes.
Studies of innovations suggest some tentative hypotheses about innovators and early
adopters.
Consumer markets
Innovators and early adopters tend towards the following characteristics:
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■ Demographics
– Somewhat younger
– Higher education
– Higher income
– Higher occupational status
■ Social factors
– Greater social participation
– Higher social mobility
– Greater geographical mobility
– Greater opinion leadership
■ Personality factors
– More risk taking
– Oriented towards new things
– More information sources
– More print media readership.
Industrial markets
The characteristics of organisational buyers most likely to be fast adopters are the fol-
lowing. First, they will be organisations that obtain the highest economic value from
the product. This may be from either superior performance (higher output, quality,
uptime) or lower costs (installation, operating costs). Second, they will be organisa-
tions that can utilise low state of art innovations. Generally, the initial innovation is a
basic version and does not have the sophistication or features of later models. Third,
the cost of failure must be manageable to the customer. Innovators are often those
who can try a product out on a sample of their operations rather than take the entire
risk. Fourth, low switching cost encourages innovation. If a company has recently
trained its workers to use one operating system, it will be reluctant to switch to a com-
pletely different one. Finally, some organisations have a higher perception of technical
change than others, perhaps because they are high-tech businesses themselves or
because they need to utilise the most up-to-date technology to stay competitive.
Characteristics of the new product or service also influence the speed of adoption. Six
factors can be identified:
■ Relative advantage. The greater the perceived added value possessed by the new
product, the quicker it is likely to be adopted.
■ Compatibility. Adoption is quicker if the new product is consistent with current use
and practice. For example, the video achieved rapid market penetration because it
was compatible with current TV viewing habits.
■ Complexity. Speedy adoption is hindered by products that are difficult to under-
stand and use.
■ Divisibility. Adoption is stimulated if a customer can sample the product in a part of
its operation or sample it for a limited period.
■ Risk. The greater the economic or social risk attached to new product failure, the
more reluctant buyers will be to try it.
■ Communicability. Where product performance can be seen or easily demonstrated,
adoption is facilitated.
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Notes
Summary
Peter Drucker wrote that management has only two key tasks: marketing and innovation.
Marketing aims at satisfying customers today; innovation focuses on satisfying
tomorrow’s customers. Without a capacity to innovate continually, a company will fade
away as needs change, technology advances and competitors progress.
In the 1990s the pace of innovation accelerated. Innovation is used by the top companies
as a central strategic weapon. They beat their competitors not by price, but by making
competitors’ offers obsolete, by providing customers with new products that offer superior
value. Creating a strategy for innovation requires far-reaching changes in the
organisation. It requires vision, a focus on speed of development, constant testing
against customers’ expectations and careful planning.
Questions
1 What are the differences between the way scientists see innovation and the way marketing
people tend to see it?
2 What advantages do companies that focus on innovation obtain?
3 Why do many companies fail to innovate?
4 What advice would you give to a company that wishes to accelerate its pace of innovation?
5 Some new products get adopted much more quickly than others. What accounts for such
differences?
6 In developing a marketing plan for the launch of a radically new industrial product, what
factors would influence the choice of target market segments?
Notes
1. New Product Management for the 1980s (New York: Booz, Allen & Hamilton, 1982).
2. Michael E. Porter, Competitive Strategy (New York: Free Press, 1980), pp. 34–46.
3. This and the following section draw heavily from George Stalk and Thomas M. Hout,
Competing Against Time (New York: Free Press, 1990).
4. Adapted from ibid., pp. 169–95.
5. For example, Jennifer George and Gareth Jones, Understanding and Managing Organisational
Behavior (New York: Addison Wesley, 1996).
6. Robert G. Cooper, Winning at New Products: Accelerating the process from idea to launch (New
York: Basic Books 2001).
7. Gary Hamel and C. K. Prahalad, ‘Corporate imagination and expeditionary marketing’,
Harvard Business Review, July 1991, pp. 81–92; Pierre Berther, James M. Hulbert and Leyland
F. Pitt, ‘To serve or create: strategic orientations towards customers and innovations’,
California Management Review, 42, no. 1 (1999), pp. 37–56.
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9736 MMST_C07.QXD 12/5/05 2:50 PM Page 224
8. Simon Majaro, The Creative Process (London: Allen & Unwin, 1991).
9. Patrick Barwise, Paul R. Marsh and Robin Wensley, ‘Must finance and strategy clash?’,
Harvard Business Review, September–October 1989, pp. 91–8.
10. David A. Aaker, V. Kumar and George S. Day, Marketing Research, 7th edn (New York: Wiley,
2001).
11. Peter N. Golder and Gerard J. Tellis, ‘Pioneer advantage: marketing logic or marketing
legend?’, Journal of Marketing Research, May 1993, pp. 158–70.
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‘The majority will buy on price, but some

will pay a slight premium. In our case,
a 5 per cent premium translates into
an extra £250 million profit a year.’
Sir Colin Marshall,
past chairman of British Airways
Chapter 8 PRICING POLICY: DELIVERING VALUE
Pricing is key to the firm’s profitability in both the short and long run. In the short run,
pricing decisions invariably have the biggest impact on the profit and loss statement. For
example, for a typical company with a contribution margin of 40 per cent and a net profit of
10 per cent, the achievement of 10 per cent higher prices would potentially double profits
(Table 8.1). Analogously, if prices are cut by 10 per cent, profits could disappear altogether.
By contrast, a 10 per cent volume increase in this business would generate only 40 per
cent more profit, and a 10 per cent cut in overheads only 30 per cent more. Even if a 10
per cent price hike cut demand by 10 per cent, total profits would still rise by 50 per cent.
Pricing therefore has the greatest impact on the immediate performance of the business.
Many senior managers do not sufficiently understand this. More effective pricing is normally
the single most important thing new management can do to enhance profits quickly.
In the long run, pricing is even more crucial. The fundamental objective of business
strategy is to offer customers enhanced value so that prices can be raised substantially
above costs. In other words, the long-run aim of business is to charge customers higher
prices! At a minimum, the aim is to achieve volume or market share gains without
eroding profitability. Customers select suppliers that offer superior value. Value is a
combination of price and the relative functional and psychological advantages that the
supplier’s brand offers. Companies seek to provide superior offers through innovation,
quality, speed of delivery and service and other product enhancements, so that they can
be preferred suppliers, rather than having to compete on low prices and margin erosion.
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Chapter 8 Pricing policy: delivering value
Table 8.1
€ million
Income statement:
Alpha Products Turnover 200
Discounts and allowances 30
Materials 30
Direct labour 40
Other variable costs 20 –
Profit contribution 80
Marketing and advertising 10
Research and development 10
Fixed costs 40 –
Net profit 20
Sensitivity analysis: Effect of 10% changes in price and costs on varying assumptions
about volume losses
Change in profits €m (+%)

Volume loss
Change in 0% –10% –15%
Price (+10%) 20 (100) 10 (50)1 5 (25)

Total overhead (–10%) 6 (30) –2 (–10)2 –6 (–30)
R & D (–10%) 1 (5) –7 (–35) –11 (–55)
Marketing and advertising (–10%) 1 (5) –7 (–35) –11 (–55)
Fixed costs (–10%) 4 (20) –7 (–35) –11 (–55)
Volume (+10%) 8 (40) – –
1 For example, if prices are increased by 10% and volume falls as a result by 10%, then profits rise by
€10m (or +50%)
2 If total overhead costs are cut by 10% (€6m) and volume falls as a result by 10%, then profits fall by
€2m (–10%)
Low prices rarely provide a sustainable basis for competitive advantage in today’s
markets. Fierce international competition from countries with low labour costs and high
productivity, together with changing exchange rates, makes substantial cost advantages
increasingly fleeting. In addition, outside commodity markets, many customers are not
highly price sensitive – price is only one dimension of value. Finally, in those commodity-
like markets where demand is highly price sensitive, competitors will inevitably match
price cuts to prevent substantial market share losses, even if this means taking losses in
that product line.
Many companies are poor at pricing. One common mistake is to base prices upon
mechanical cost-plus formulas. Managers fail to appreciate how seriously such methods
can erode profits and detract from exploiting market opportunities. The drive to lower
costs is important. But the motivation for cost reduction should be not to lower prices,
but rather to permit more resources to be made available for investment in new products
and product enhancements. Another common mistake is to overestimate the price
elasticity of the market. In particular, sales people and marketers often blame poor sales
on the company charging too high prices. Of course, it is easier for them to sell at low
prices, but the real challenge is to train those at the customer interface to demonstrate
value, not opt for the easy solution of selling on price.
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Assessing price competitiveness
In the following sections the major pricing issues faced by senior managers are
discussed. First, how can they assess whether their current pricing strategy is
appropriate? Second, how should prices be set initially when a product is about to be
launched? Third, how can the company manage reseller mark-ups to prevent profit being
eroded by strong trade buyers? Finally, how should managers change prices, particularly
when they need to raise prices to preserve margins?
Assessing price competitiveness
Developing a pricing strategy starts with the assessment of price competitiveness and
the formulation of pricing objectives (Figure 8.1). The first task is to determine which
competitors in the market are seen by customers as offering the best value. Value is a
combination of price and perceived quality. Assessing value therefore requires
research into how consumers perceive the quality of alternative offers. There are sev-
eral methods of varying technical sophistication for researching such perceptions.
The most useful of these techniques focus around the following steps:
1 Identify the dimensions of quality. Find out what product and service attributes cus-
tomers are looking for when they choose suppliers.
2 Weight quality dimensions. Determine which of the attributes are regarded as the
most important by customers.
3 Measure competitors along dimensions. Customers are then asked to rate competi-
tors’ offers along the dimensions of quality that have been identified.
4 Discover price/quality preferences. What are the combinations of price and quality
most preferred by customers?
For example, a manufacturer of industrial cutting equipment was concerned about its
poor market share and wondered whether its prices were the problem. It undertook a
market research study that identified the product and service attributes most desired
by customers and evaluated how its product (X) and its key competitors were rated
(Table 8.2). The resulting perceived quality ratings together with the company’s prices
were then displayed on a value map (Figure 8.2). This showed that there were three
segments in the market: a premium segment dominated by company A; an economy
segment led by company C, where prices were half those of A; and the largest
Assess price Set pricing Strategic Target market

competitiveness objectives price focus segment
Evaluate competitive Measure value Product line Select

Figure 8.1 strategies to customer pricing price
Developing a pricing
strategy
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Table 8.2
Competitors
Assessing price
and value Importance weight (%) Quality dimensions A B C X
competitiveness
35 Precision 6 5 4 6
25 Reliability 6 6 3 4
15 Durability 5 3 2 5
20 Service 5 3 5 1
5 Delivery 2 5 5 5
Weighted score 5.5 4.6 3.7 4.3
Actual prices (€000) 29 21 15 22
Market share (%) 27 45 20 8
High
Poor value Premium segment
A
Relative price
X
Quality for price line
B
Average
Economy segment Good value

Low
Figure 8.2
Value map: Inferior Superior
assessing pricing Relative quality
competitiveness
segment in the middle, dominated by company B with a 45 per cent market share.
Product X’s problem was clear: it was competing against B, but customers saw X’s reli-
ability and service as significantly inferior. It was positioned in the poor value area of
the value chart – an unfavourable combination of quality and price. The obvious
requirement for the company was to reposition X by either enhancing its quality or
lowering its price, or some combination of the two, to improve its relative value.
In using these techniques, two caveats are needed. First, it is important to remember
that where markets are segmented not all customers have the same needs. Some are
exceptionally price sensitive; others rate service or product reliability and presenta-
tion much higher. Therefore it is important to look at differences between customers
and to shape strategy accordingly. Second, the buying criteria generally vary among
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Establishing initial prices
members of the buyer’s decision-making unit (DMU). For example, in industrial mar-
kets, purchasing executives tend to be the most price sensitive, technical staff are
more quality oriented and senior executives look more at lifetime costs and whether
the seller can offer a potential competitive advantage to the company. Consequently,
by tailoring communications to specific members of the DMU, the manufacturer can
partly shape the purchasing criteria that become most important.
How should a company establish the price? Economic theory focuses on this ques-
tion. Every first-year student of economics can prove that the profit-maximising price
is determined by estimating the quantity that would be demanded at different prices
and then projecting total costs for these volumes. The optimal price is that which
maximises the difference between these estimated revenues and costs. Unfortunately,
as with many things economists tell us, while this formula is true in theory, it is not
very helpful in practice.
There are several problems that intrude on the elegant simplicity of the economist’s
pricing theory. One is that demand depends upon many other factors besides the
price. The customer is also influenced by the supplier’s reputation for service, quality
and reliability. It is also influenced by the effectiveness with which the salespeople,
publicity and advertising convey any differential advantages the brand or the com-
pany possesses. Sometimes higher prices increase demand. The classic story is Chivas
Regal Scotch whisky, which was a dying brand until its price was raised to be dramati-
cally higher than competitors. Its sales then took off. Since the product remained
identical, it was clear that price had become a quality cue. A second problem is that
pricing decisions have impacts on competitors. A price cut can fail to improve market
share because competitors match it. Third, markets may not be homogeneous but
segmented, and consequently are made up of not one, but rather a series of demand
functions. Finally, pricing is substantially influenced by the firm’s strategy. For exam-
ple, the price that maximises profits in the short run will be very different from that
which maximises them in the long run. These varying influences on the pricing deci-
sion are described next.
Pricing objectives
The initial pricing decision will be influenced by the underlying marketing and
financial objectives of the business. Since virtually all companies have multiple prod-
ucts, portfolio considerations will be important. Four strategic pricing objectives can
be distinguished:
■ Harvest. If the product is mature with a core of loyal users but facing increasing
competition from low-price or superior-value products, it may well pay to keep
prices high and allow market share to erode gradually. The cash generated can
then be funnelled into new products.
■ Maintain market share. If the product has long-run strategic value, the company may
aim at holding share. It will adjust prices defensively to prevent competitive erosion.
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■ Growth. If the product is in an attractive market and has a differential advantage,

the company may use price as an aggressive weapon to build share or enter the
market. The Japanese zip manufacturer YKK built its global dominance on just
such a pricing strategy.
■ Quality leadership. A company may seek to be leader in a premium price niche.
Companies such as Rolex, Bang & Olufsen and Rolls-Royce ignore the mass market
and cultivate customers who can pay substantially more for superior products.
Even if a company is aiming to expand the business, it does not mean that low price
is the right approach, for example Mars have been successfully developing the Galaxy
chocolate brand in the UK since the 1960s in competition with the established
market leader Cadbury Dairy Milk. The Mars offering has traditionally been priced at
a 5 per cent premium to the leader while being over 5 per cent smaller. The enhanced
profitability is used to support the Galaxy brand and continue its development.
These strategic choices are highlighted in the distinction between penetration and
skimming pricing. With a penetration pricing strategy, the firm sets its price as low as
possible to expand the market and maximise its market share. Texas Instruments,
YKK, Bic and Amstrad are companies that have pursued this strategy. With skimming
pricing, the firm sets its prices high to achieve high unit margins, recognising that it
will attract only a small layer of price-insensitive purchasers. Du Pont, Bang &
Olufsen and Aston Martin are examples of brands pursuing this strategy.
Table 8.3 highlights the factors influencing the choice between penetration and skim-
ming pricing. In general, penetration pricing is more ambitious in terms of market
share and industry leadership. The downside is the higher risk that competitive retalia-
tion will destroy the margin, or that changes in demand or technology will make the
product obsolete before the investments are recouped. Skimming pricing is less risky
financially and is particularly appealing for really new, unfamiliar products or where
markets are highly segmented. Here the downside is the opportunity cost of competi-
tors quickly pre-empting the market potential by offering lower prices and better value
to the customer.
Table 8.3
Determinant Penetration Skimming
Choosing between
penetration and
Objective Long-run market share Short-run profit
skimming pricing Risk taking Risk aversion
Demand Price elastic Price inelastic
Few market segments Multiple market segments
Competition Deter new competitors Accept new competitors
Few barriers to entry High barriers to entry
Product Image seen as unimportant Seeks prestige image
Long product life cycle Short product life cycle
Price Pressure for prices to fall Prices can be sustained
Need to move fast Fewer pressures in market
Promotion Customers understand product Unfamiliar product
Distribution Existing system Unfamiliar channels
Production High scale economies Few scale economies
Experience curve effects Few experience effects
Finance High investment Low investment
Slow payback Fast payback
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Figure 8.3 illustrates the dilemmas in these pricing strategies.1 Positions along the
diagonal or to the right of it offer combinations of quality and price that represent
value to customers. High-price strategies are viable only when associated with high
quality. Even then they may be vulnerable to competitors entering the market with
similar-quality products at lower prices, so offering higher value. Toyota’s Lexus entry
into the executive car market, for example, threatens Mercedes-Benz’s premium pric-
ing strategy. Similarly, low-price, low-quality, economy strategies are sustainable only
so long as competitors cannot offer better quality at parallel prices. Any position to
the left of the diagonal represents a clearly unsustainable strategy.
Strategic focus
The second determinant of the price will be the stage of evolution of the market. If
the market is still at the innovatory stage, so that the firm is focusing on first-time
buyers or market segments that have not yet been penetrated, demand will usually be
less price sensitive. Buyers at the start of the product life cycle are drawn by the bene-
fits of the innovation and are normally able and willing to pay higher prices. Low
prices are usually a bad idea because initially the market is constrained by lack of
awareness and risk aversion. Investment in selling, advertising or promotion is a
better way than lower prices to expand the market.
As the market develops, however, more price-sensitive customers are brought in. This
phenomenon, together with declining unit costs and new competitors, usually
requires the firm to lower its average price to maintain momentum. Because different
segments of the market generally retain different price sensitivities, it will normally
pay a firm to price discriminate. Rather than having a single product and reducing its
price steadily, it will often be better to introduce new brands or brand extensions.
Premium brands will be targeted towards the more sophisticated, less price-sensitive
segments, and discount brands to the new more price-conscious buyers. This way the
firm can curtail the erosion of its gross profit margin as the market evolves.
High Rip-off Overcharging Premium

strategy strategy strategy
Poor-value Medium-value High-value

Price Medium
Economy Good-value Superb-value

Low
Figure 8.3
Low Medium High
Alternative pricing
strategies and value Quality
implications
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Target market segments

Many markets today are made up of a large and increasing number of market seg-
ments. These segments are dynamic, often ill-defined and continually evolving. They
are triggered by the strategies of competing firms as well as by exogenous changes in
tastes, technology and economic forces. In any market, these segments differ enor-
mously in the prices that are obtained. In cars, computers, watches, clothes, hotels,
airline tickets and numerous other fields, prices between the ‘economy’ and ‘pre-
mium’ segments differ by a factor of at least 10. The spread in the profit margins on
these products is even greater. For example in the UK a cup of coffee made from
Tesco value granules costs about €0.01, one made from Nescafé standard granules
costs six times as much and a cup of Nescafé Alta Rica ten times as much at €0.1.
Drinking a cup of coffee in a McDonald’s restaurant costs around €2 and in Starbucks
about €3.
Clearly, therefore, how a brand is positioned in the market – the choice of which
target market segment it chooses to appeal to – is crucial for its pricing and profit per-
formance. This choice of segment will depend upon an evaluation of the size,
growth, profitability and competitiveness of the alternatives, as well as an analysis of
the brand’s ability to compete in them.
Normally, however, an aggressive competitor will not limit itself to one segment, but
seek to operate in several or all of them. This strategy provides, first, economies of
scope – operating and development costs that can be shared across customer groups.
Second, it provides a barrier against competitors entering undefended segments.
Third, it allows the company to take advantage of the differing price and quality
requirements across the segments. Finally, multibranding will allow the company to
obtain more intense distribution by getting more floorspace or additional distribu-
tion channels. So, for example, H-P offers a range of printers from basic models at €75
for occasional home usage, up to sophisticated models for €2,500. A British Airways
return ticket to New York ranged from €300 to €5,400 first class in mid-2005. Tyre
companies such as Michelin and Goodyear produce a range of tyres: expensive inno-
vative ones for drivers of BMWs and Porsches, plus second- and third-tier brands
under different names aimed at mid-price and budget customers. Such strategies
enable them to cover the whole market without sacrificing the profit obtainable on
premium brands.
Equally importantly, a firm can create new market segments through imaginative
pricing and innovatory marketing. For example, Novartis gained a substantial share
in the highly competitive market for hypertension drugs by offering patients a ‘life-
time guarantee’ on the prices they paid. Smart created a new premium segment in
the micro-car market. Swatch created a new fashion segment in the watch market
with the combination of low prices and high design content.
Competitor targets
Unfortunately, the firm does not set prices in isolation. Even if customers are price
sensitive, it does not make sense to enter the market with a low price if this triggers
competitors into price-matching strategies. In setting prices, the firm has to estimate
the likely reaction of current competitors.
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Several factors affect the likelihood of competitor response. If competitors see the
firm as a potentially major player in the industry, they cannot afford to ignore its
moves. If the market is not growing, a low-price entrant will be seen as highly aggres-
sive and threatening. Retaliation is more likely when the customers see few
differences between competitors. Here the industry approaches a commodity-like
market in which significant price differences between suppliers cannot be sustained.
Finally, if the industry is characterised by high fixed costs, competitors will be loath
to lose volume, and prices may drop to very low levels.
Competitive retaliation is less likely if the firm signals that its market share objectives
are modest. In this case, current competitors may see it as less costly to live with the
newcomer than to slash their own margins. If the industry is growing and there are
substantial differences in the positioning strategies of competitors, retaliation is again
less likely.
Measuring value to the customer

A differential advantage is obtained when a firm offers customers value they cannot
get elsewhere. By creating such a differential advantage, the firm can obtain higher
prices and earn higher profit margins. This advantage can be economic or psycholog-
ical, or both. The first is particularly important in business markets where buyers are
motivated by the aim of increasing the profitability of their own enterprises.
Economic value to the customer (EVC) is a central concept in pricing industrial prod-
ucts. By developing an offer with high EVC, a company can charge significantly
higher prices and still offer its customers superior value. The higher-priced product
may offer value because it generates more output than its competitor or because the
operating costs associated with it (e.g. maintenance, labour, depreciation) are lower
over its economic life.
The concept of EVC is illustrated in Figure 8.4. Suppose the market leader is selling a
machine tool (product X) at a price of €30,000. In purchasing this product, the cus-
tomer will also have to cover start-up costs of €20,000 (installation, initial training,
etc.) and post-purchase costs over the life of the machine with a present value of
€50,000 (labour, maintenance, power and other operating costs). Thus the total life
cycle cost of the machine is €100,000. In other words, the price is under one-third of
the total cost of employing the equipment.
If a competitor wants to dislodge the market leader, it must offer superior EVC. One
way is simply to price cut. But this is not likely to be a decisive strategy here because,
even if the machine price is cut by 20 per cent, the saving to the customer of €6,000
is only 6 per cent of the total cost. A better way may be to focus on building a more
effective machine that cuts start-up and operating costs. For example, a new product,
Y, is shown as reducing these costs by €30,000. Here the EVC that product Y offers
the customer is €60,000 (€100,000 less €40,000). That is, the customer should be will-
ing to pay up to €60,000 for Y. At this price both machines would have the same total
cost. Below the €60,000 price, it would be rational for the buyer to switch to Y, pro-
viding, of course, all other things were equal between the two suppliers. To give the
customer the incentive to switch from product X, the price of Y might be set at, say,
€45,000. Here the manufacturer would be selling at 50 per cent price premium and
the customer would have a saving of €15,000 in total life cycle costs.
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9736 MMST_C08.QXD 12/5/05 2:51 PM Page 234
€130,000
Added
value
€100,000 €100,000
Life cycle cost EVC =
€70,000
Purchase €30,000
price
EVC =
€60,000
€20,000
Start-up cost €20,000
€10,000
Post- €50,000
purchase €40,000
costs €30,000
Figure 8.4 Market leader X New product Y New product Z

Pricing and
economic value to Source: Based on J. L Forbis and N. T. Mehta, Economic Value to the Customer. McKinsey Staff Paper (Chicago, IL:
McKinsey, February 1979), p.3.
the customer
Besides lowering a customer’s costs, a new product may also enhance its revenues. For
example, the new machine might turn out more finished products for the customer,
or products with superior quality. Product Z in Figure 8.4 illustrates this. This product
offers the customer a cost saving of €10,000 over the market leader and €30,000 extra
contribution margin arising from enhanced output. Here the EVC and the maximum
price the customer should be willing to pay are €70,000 – more than double the price
of the market leader.
Using this concept, the firm will target those market segments where the EVC is
highest. In such segments the product is most attractive and so it is here that the firm
can obtain the highest prices. In the above example, it may pay the firm to launch
two new brands: a higher-priced brand Z to the quality-oriented customers and a
lower-priced Y brand to the cost-oriented segment of the market. EVC is one of the
most crucial concepts in marketing and an essential tool in business-to-business pric-
ing decisions. But effective employment of it requires highly sophisticated and
well-trained salespeople who are adept at segmenting customers, analysing their
value chains and demonstrating economic value to them.
The concept of EVC is important because it can be shown that often the initial pur-
chase price is only a small proportion of the total user cost. For example, the initial
purchase price of a corporate personal computer accounts for only 10 per cent of the
average lifetime cost. The rest is troubleshooting, administration, software and train-
ing. If the company pays €2,000 for the PC, the total cost amounts to €20,000. EVC
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goes to the heart of marketing – customers do not want products; they want to meet
their needs. In business the crucial needs are to cut costs, increase profits and raise
sales. When a salesperson tries to sell a product, the customer focuses on the cost of
acquiring it and quickly moves to comparing it with the cost of competitors’ products.
This comparison invariably pushes down the price. With EVC, however, the supplier
focuses on what it can do to improve the customer’s performance. Here the supplier
focuses on the costs that the customer can save, rather than the costs to be incurred.
Perceived value
The concept of EVC is most useful when a new brand has demonstrable economic
advantage for the buyer. At other times the advantages of the brand are perceived or
psychological rather than economic. This is generally the situation in consumer mar-
kets. There are a number of research methods to determine the perceived value of a
brand. One of the most popular in recent years has been conjoint or trade-off analy-
sis. This has been applied successfully across a wide range of consumer and industrial
products and services.2
Trade-off analysis recognises that in developing a new product the manager has to
decide among a range of potential features. These features add costs, but they may
also substantially enhance the perceived value of the product to the buyer. Trade-off
analysis helps the manager choose the combination of product features and price
that will optimise profits.
For example, consider a major cosmetics company planning a pricing and develop-
ment strategy for a new men’s aftershave. In developing a positioning strategy for the
new brand, the product manager has to decide between the following:
■ Three retail price levels (€13, €16, €19 per 50 ml bottle).
■ Two dispensers (regular, spray).
■ Two pack designs (normal, premium).

■ Three perfumes (menthol, floral, musk).
■ Three brand names (GT1, Solo, Zolex).
With these combinations there are 108 (3 × 2 × 2 × 3 × 3) possible product concepts –

far too many for any consumer choice test. However, it can be shown that through a
specific sampling procedure the crucial information can be obtained from a set of
only 18 of these concepts (Table 8.4). Customers are asked to rank these 18 concepts,
and from these preferences the values (or utilities) of the various features are derived
from a computer analysis. These are shown in Figure 8.5. From these utility functions
it can be seen that customers prefer the €13 price, the spray dispenser, the premium
pack design, menthol and the Zolex brand name. Of course, this most preferred
option is not necessarily the most profitable one for the company – low price and
premium features, for example, imply very low profit margins.
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Table 8.4
Concept Price Dispenser Package Perfume Brand name Rank
Customer
preference rankings
1 €16 Regular Premium Menthol Solo 6
of eighteen product
concepts 2 €19 Spray Normal Menthol Zolex 5
3 €16 Regular Normal Musk GTI 10
4 €19 Regular Normal Musk Solo 16
5 €13 Spray Normal Musk Zolex 1*
6 €13 Regular Normal Floral GTI 13
7 €16 Spray Normal Floral Solo 11
8 €19 Regular Premium Floral Zolex 17
9 €16 Spray Premium Menthol GTI 2
10 €19 Regular Normal Menthol Solo 14
11 €13 Regular Normal Menthol Zolex 3
12 €19 Spray Normal Musk GTI 12
13 €13 Regular Premium Musk Solo 7
14 €16 Regular Normal Musk Zolex 9
15 €19 Regular Premium Floral GTI 18
16 €13 Spray Normal Floral Solo 8
17 €16 Regular Normal Floral Zolex 15
18 €13 Regular Normal Menthol GTI 4
*Highest preference ranking
10 9 10 10
8 7
6
Utility
4 4
1
0 0 0
13 16 19 Regular Spray Normal Premium
Price Dispenser Package
10 10
8
7 5
Utility
5
5
Figure 8.5 3
Trade-off analysis: 0 0
measuring Menthol Floral Musk Zolex Solo GTI
consumer Perfume Brand name
preferences
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The next step is to estimate the long-term potential market shares that alternative
versions of the new product could achieve. For example, suppose the market is cur-
rently dominated by three brands, A, B and C, with the features shown in Table 8.5.
If Zolex is introduced with a low price, then its total utility is estimated from the
functions as 39, significantly higher than the existing brands in the market.
Table 8.5
Brand A B C ZOLEX
Trade-off analysis:
utilities of
Price (€) 19 (1) 19 (1) 13 (9) 13 (9)
competitive brands Dispenser Spray (8) Regular (4) Regular (4) Spray (8)
Package Premium (7) Normal (4) Normal (4) Premium (7)
Perfume Menthol (7) Floral (5) Musk (5) Menthol (7)
Name A (5) B (5) C (5) Zolex (8)
Total utility 28 19 27 39
Note: Assumptions: market size 10 million units; 100% trade mark-up; variable cost €5/unit
The final stage is to estimate the profitability of the new brand at different price levels.
Suppose that the size of the market is 10 million units, the variable cost is €5 per bottle
and the distribution channels absorb 100 per cent mark-up. As Table 8.6 shows, while
the low price maximises utility and expected market share, because of the low margin it
is the least profitable alternative. Even though the premium pricing strategy is esti-
mated to cost substantially more in marketing overhead (additional advertising and
brand support), the higher margin makes it the best choice. At a retail price of €19, the
potential market share is only five points lower and revenue, contribution and net
profit are substantially higher than under the two alternative pricing policies.
Table 8.6
Revenue (€m) Costs (€m)
Predicted profit
performance of Price Utility Market share (%) Retail Net Variable Fixed Profit (€m)
Zolex at different
£13 39 35 (39/113) 45.5 22.8 17.5 2 3.3
prices
£16 36 33 (36/110) 52.8 26.4 16.5 3 6.9
£19 31 30 (31/105) 57 28.5 15.0 5 8.5
Note: Assumptions: market size 10 million units; 100% trade mark-up; variable cost €5/unit
Product mix pricing
Companies normally sell a range of products and develop a product line pricing
policy within which individual product prices are determined. Several common
situations are identified:
■ Product line pricing. A marketing-oriented company will normally develop a product

line rather than a single brand. By developing a graduated line of brands, the com-
pany can market and pursue a differential pricing strategy. For example, Castrol sells
a range of car lubricants from a low-price GTX, to more expensive GTX2 and GTX3,
and up to GTX7 in Japan. By such price positioning the company can exploit differ-
ent price elasticities among consumers and distributors, and encourage customers to
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trade up to higher-margin brands. In these situations, price points are selected to

signal clear quality differences between the brands in the line.
■ Follow-on products. Some products require subsequent purchases. For example, pur-
chasers of a computer printer will need subsequently to buy replacement
cartridges. Suppliers of the initial product may price low to stimulate demand,
with the objective of making higher margins on subsequent products. To be effec-
tive, however, the manufacturer needs to be sufficiently dominant or specialised to
prevent competitors taking advantage of this strategy by attacking the ancillary
market with lower-priced substitutes.
■ Blocking products. Sometimes it will pay a company to sell at uneconomic prices to
block competitive entry. It may cross-subsidise sales in one segment or geographi-
cal area to dissuade competitors from expanding into this market.
■ Bundled and option pricing. To reduce the perceived price, a product may be adver-
tised at a low, stripped-down price. At the point of purchase, the salesperson will
then seek to encourage the buyer to add high-margin features. A typical buyer of a
€100,000 Mercedes will be persuaded to spend another €20,000 on options and
features that will add €5,000 to the company’s margin. In contrast, Japanese com-
petitors normally bundle a comprehensive range of features into the sticker price
to offer customers a superior value proposition.
■ Parallel imports. Increasingly, pricing is an international problem. With differences
in living standards and distribution systems, countries normally differ in price
responsiveness. It would therefore be more profitable to set different prices in each
country. Unfortunately, legal restrictions and parallel imports increasingly make
such strategies difficult. Companies may then have to price too high in some mar-
kets to protect their margin in other, less price-sensitive ones.
Initiating price changes
Normally the pressure on firms is to reduce prices. The experience curve, increasing
competition and rising customer price sensitivity as markets evolve all stimulate
falling real price levels. On the other hand, inflation, the stock market’s expectation
of growing profits and the difficulty of finding enough new products to replace estab-
lished brands all encourage entrepreneurial managers to consider ways of increasing
margins. Of course, cost reduction is the most obvious way to improve margins, but
price increases can have a major impact.
In periods of high inflation, obtaining price increases is easier. With an inflation rate
of 20 per cent a year, buyers do not see a 23 per cent price increase as remarkable, but
at low rates of inflation real price increases are much harder to achieve and in many
markets price deflation makes price increases virtually impossible. Strategies to obtain
higher prices can be seen as a spectrum (Figure 8.6). On the one hand, there are some
techniques that management can try immediately, but their success is uncertain. On
the other hand, there are straightforward ways to obtain better prices, but they
often cannot be implemented for several years. The best example of the latter is the
introduction of a superior product – customers normally expect to pay more for prod-
ucts with superior benefits or higher EVC.
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Initiating price changes
Achieving higher prices
Figure 8.6
How to obtain
higher prices
Influencing the psychology of the sales team

These tactics relate to sales training and motivation. Sales people are often order
focused rather than profit focused. They are often so worried about losing the order
that they cave in too easily to price pressure. Management needs to instil the virtue of
courage in the salesforce – a willingness to take more risks in pushing for justified price
increases. Next salesforce incentives should be reviewed to encourage a focus on prices.
Some sales teams are still bonused on volume, which invariably undermines efforts to
improve gross margins. Tying rewards to gross margins obtained or even realised prices
can often have a significant impact on results. Third, professional negotiating skills are
essential in today’s markets. Management should not permit individuals to engage in
price discussions with buyers without a thorough training in negotiation.
Contracts and terms

With long-term contracts or agreements where there is a significant gestation period
between order and delivery, skilled managers can often negotiate escalation clauses.
Such clauses allow the supplier to protect its margins by having prices rise automati-
cally with inflation. With the increasing shift to favouring long-run relationships
between buyers and sellers, such clauses can have an enormous impact on profitabil-
ity and avoid the necessity of destabilising annual price negotiations. Cost-plus
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formulas are another contractual approach to margin protection. Suppliers can agree
to meet new customer needs on the basis of protected margins. Enhanced products
can then be introduced without downside risk. Finally, reductions in discounts act in
the same way as price increases. Most companies erode their high prices with cash
discounts for early payment, quantity discounts, trade discounts, seasonal discounts
and other allowances for promotion or trade-in.
Demonstrating values rather than products

Where salespeople focus on selling their product or its features, they fail to take advan-
tage of many opportunities to differentiate their company’s offer. When differentiation
is weak, price competition becomes paramount. To avoid this, one essential approach is
to sell packages not products. Packages include the services, technical support, terms
and guarantees offered alongside the product. A further step is to show economic value
to the customer (EVC), rather than price. This means showing the life cycle savings
resulting from accepting the firm’s offer. Here the supplier demonstrates economic ben-
efits rather than purchase costs. A more general move is to build brands and emphasise
the confidence and reduced risk involved in purchasing a well-known brand. When a
bluechip company signs up with McKinsey or a young person buys a pair of Oakley’s,
they willingly pay the price premium because they perceive the brand as unique, con-
veying an image, reputation and confidence not possessed by competitors.
Segmentation and positioning

Basic to any marketing strategy, and particularly fundamental to pricing, is the recog-
nition that customers differ enormously in price sensitivity. For some customers,
price is the dominant criterion, but for others quality, service and image are much
more significant. An average 5 per cent price increase is almost invariably best
achieved by recognising that some customers will not accept any increase at all,
while others will accept a 10 or even 20 per cent increase. Segmenting customers by
price sensitivity is therefore a crucial step. It requires building up an understanding of
what factors most influence the buying decisions of individual customers. What is
the relative importance of price, service dimensions and the supplier’s commitment
to the customer? Such an analysis should lead to different types of package and levels
of price being offered to each segment.
A further step to provide even greater scope for price and offer discrimination is the
development of a multibranding strategy. Here differentially priced brands are tar-
geted to different segments of the market. So Diageo sells Johnnie Walker Red Label
Scotch whisky at €25, Black Label at €40 and Blue at €175. Such a strategy often per-
mits a trading-up policy to be employed, where customers who start with entry-level
brands (e.g. American Express Blue Card) can be encouraged to move up to the more
expensive versions (e.g. the Amex Black Card). It also permits fighter brands to be
employed against aggressive competitors in low-price market segments. A fighter
brand allows a company to defend its market share without having to cut prices
across the entire market.
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Controlling reseller mark-ups
Exit barriers
Skilful companies create exit barriers that make it difficult for the customer to switch
to lower-price competition. Such barriers include outstanding levels of service, loyalty
schemes, online links between supplier and customer, provision of specialised equip-
ment, training and research and development partnerships. Exit barriers act to fuse
the customer to the buyer, making it unattractive to throw away the investment
embodied in the relationship.
Innovation
In the long run, innovations that offer customers superior value are the only way to
achieve better prices. All the other routes are one-off or limited opportunities that
eventually erode market share. New product development is the most obvious source
of innovation. But marketing innovations in the form of new varieties (e.g. Diet
Coke), new presentational formats (e.g. patch-based delivery systems for pharmaceu-
tical products in place of tablets) and new services (e.g. Internet banking) are equally
important. Without bringing new value to the market, a company’s products and
prices are invariably commoditised by competitors and new formats.
In discussing prices, it is important to be clear about what price is being considered.

There is a big difference between the price the consumer pays and the price the man-
ufacturer receives. A supplier designs an offer and conceives a price that will make it
attractive to end customers. Unfortunately, in practice it does not normally set this
price. Usually, suppliers sell through resellers – distributors, wholesalers, retailers or
some combination of these – and it is these organisations that establish the final
price to consumers. These resellers can easily acquire a mark-up of 100 per cent of the
supplier’s price. This mark-up covers the value-added activities met by the distributor
– carrying stock, selling, distribution, customer support, its corresponding overhead
costs and profit (Figure 8.7).
A business is likely to be concerned to influence the mark-up taken by its resellers.
After all, a business has four ways it can increase its total profit:
■ Increasing its sales volume.
■ Cutting its costs.
■ Raising the price that its products or services can command in the market.
■ Raising its price to its resellers without them in turn raising the price to customers.
This last option – reducing the trade mark-up, is the most neglected strategy, but it
can be the most powerful method of improving profits. For example, if the reseller’s
mark-ups amount to 100 per cent of the ex-factory price and the manufacturer is
operating on a 10 per cent net profit margin, a cut of one-tenth in the reseller mark-
up would double the manufacturer’s profits.
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Price paid by customer

Dealer margin
Advertising and
promotion
Reseller value
chain Selling and
distribution
Inventory
costs
Buying and
overhead Price received by
manufacturer
Manufacturer margin
Selling and
advertising
Manufacturer’s Manufacturing
value chain
Research and
development
Figure 8.7 Procurement

Determinants of the
final price
There are three ways in which the manufacturer can reduce these reseller mark-ups.
The first option is coercive power, where the manufacturer threatens unilaterally to
change or terminate the relationship if the distributor does not accept higher prices
and lower mark-ups. If the distributor is highly dependent upon the manufacturer,
this may work in the short term. But since this strategy cuts the reseller’s profits, it
invariably produces resentment and curtails its support for the business. In the long
run, coercive power is rarely effective.
A better alternative is to seek a reduction in mark-up without a corresponding reduc-
tion in the reseller’s profitability. One way is to create strong customer pull. Strong
brands invariably offer dealers smaller margins than weak ones. While end customers
may pay the same prices for a brand leader and a brand follower, the latter will nor-
mally have had to offer the trade substantially higher discounts to obtain distribution
and compensate for the lower stock turn. Strong products compensate the dealers for
lower mark-ups by offering higher turnover.
Another alternative is to explore the dealer’s value chain (Figure 8.7). The margin
that the dealer takes is to cover its costs and make its profit. It may pay the manufac-
turer to take over some of these tasks and negotiate a lower margin with the reseller.
In this case, both can be better off. The manufacturer can undertake some distribu-
tion and wholesaling tasks for distributors and retailers; it can support their selling
and promotional activities; or it can provide information and knowledge about its
markets to enhance their competitive performance.
In retailing, the new concept of category management reflects this type of approach.
Some major retailers are choosing partners to manage an entire category of merchan-
dise in the store. For example, Safeway might choose Coca-Cola to manage its entire
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soft drinks category. The supplier provides the retailer specific profit and sales volume
results, and in return takes over the management of the category, including the pur-
chase of competitor products, layout and stock control. Similar trends are apparent in
other areas. In business-to-business markets, car companies such as Ford and GM are
selecting first-tier suppliers that take over entire areas. For example, Delco might be
given responsibility for sourcing and managing all Ford’s vehicle electronics, while
Shell might be given all the lubricants areas. In health care, disease management is a
similar concept (see Box 8.1). Here pharmaceutical companies such as Pfizer and
Merck, instead of selling just drugs, offer to take over responsibility for managing and
treating all aspects of a particular disease category. The health care service obtains the
benefit of guaranteed cost, while the pharmaceutical company moves away from an
adversarial relationship focusing on price. Such programmes are not without critics as
explained in Box 8.1.
Box 8.1 Pfizer/NHS partnership criticised

Drug manufacturers’ role in NHS raises fears over ethics
The National Health Service is employing nurses paid for by drug companies to encourage patients to take
medication under schemes that doctors fear could result in some people receiving inappropriate treatments.
In the most advanced scheme, nurses funded by Pfizer, the world’s biggest pharmaceutical firm, are
advising patients in north London on how to manage heart disease and diabetes.
The British Medical Association has called for new ethics standards to be agreed immediately to protect the
independence of doctors and patients.
Dr Charles Simenoff, a member of the BMA’s prescribing committee, and a general practitioner in
Manchester, said: ‘I think that this is bordering on the unethical. There are issues about making sure that
GPs prescribe their products rather than someone else’s. If these care managers see that patients aren’t
being treated, or aren’t being treated with Pfizer drugs then they might put the suggestion in patients’ minds
that maybe they should be.’
NHS officials have conceded that the deals mark a profound shift in strategy by the drugs companies, as
they focus on the expanding market for drugs that treat diseases of old age.
In north London, a four-strong team of ‘care managers’ funded by Pfizer has recently begun producing
treatment plans for 600 patients in the Haringey Teaching Primary Care Trust health authority. The care
managers, who are trained nurses, use Pfizer software to produce treatment plans for the patients, who are
suffering ischaemic heart disease, diabetes or heart failure. Although they will not be able to see patients’
medical records, they will be told by doctors what medication is being prescribed so that they can ‘reinforce’
the care given by GPs.
Sarah Barron, the assistant director for chronic diseases in Haringey, said that the Pfizer staff regularly
contacted patients by telephone to ‘coach, support and advise’ them. One of their main functions was to
ensure that patients continued to take their medication. Failure to comply with medication is a problem in
caring for the burgeoning number of people with long-term diseases such as heart failure, diabetes, high
blood pressure and high cholesterol. In cases where patients have not been prescribed necessary drugs or
where patients are on the wrong treatment, care managers can refer patients back to their GP. Some of the
money for the scheme is coming from the Department of Health, but Pfizer is contributing half the cost –
£125,000. The scheme is intended to save the NHS money by keeping patients out of hospital.
▼
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Pfizer said that it was unable to provide figures for its drug sales before and after the project in
Haringey began.
Miss Barron added, however: ‘We’re under no illusion why Pfizer is doing this. They’re keen to be part of
something that is going to be very big in the NHS – the treatment and management of chronic diseases.’
Already 17.5 million Britons are being treated for chronic conditions and the figure will grow as the
population ages.
Dr Richard Nicholson, the editor of the Bulletin of Medical Ethics, said: ‘We need an immediate public
debate on this. The scheme in Haringey was happening on my own doorstep and I wasn’t even aware of it.
The Department of Health is happy to work with drugs companies regardless of whether this is in the long-
term interest of patients. But we need to know whether the public really wants this and whether we should
be opening up the NHS to private firms with vested interests.’
The Sunday Telegraph has learnt that several other similar arrangements, funded by either GlaxoSmithKline
or Pfizer are planned for health authorities or hospital trusts across London. Dr Peter Fellows, the chairman
of the BMA’s prescribing committee, said that it was ‘inevitable’ that the arrangement would influence GPs’
prescribing choices. Pfizer has emphasised that the programme does not demand the prescription of its
own heart drugs and that NHS doctors will have the final say on which drugs the patients receive.
Dr Olivier Brandicourt, the managing director of Pfizer UK, said: ‘Providing this kind of personalised
education and support enables patients to become more active partners in their own healthcare.’
A spokesman for GlaxoSmithKline said: ‘We’re working with a number of strategic health authorities to help
primary care trusts review patients. We can provide some of the resources to do that. We’re helping the
NHS achieve their objectives. While patients are not being reviewed, they might be going without
treatment.’ He added, however: Ultimately it’s still the GP who decides what drugs the patients get.’
Alan Maynard, a professor of health economics at the University of York, expressed concern. ‘This gives the
drugs companies a way in, the chance of more direct contact with patients. Ultimately they think that it will
prove commercially advantageous or they wouldn’t be doing it.’
Charles Medawar, the director of Social Audit, an organisation that campaigns for greater transparency in
drug regulation, said: ‘If there was ever a subject that deserves thorough examination, then this it is. The
implications are very, very worrying indeed.’
Source: http://www.telegraph.co.uk/health/main.jhtml?xml=/health/2004/09/29/ndrugs26.xml
One increasingly powerful method of offering economic value to the distributor is

through a time-based advantage.3 Retailers, for example, can substantially increase
their return on investment by carrying less inventory. Particularly for fashion-based
retailers, large stocks involve not only high inventory carrying costs, but also high
risks of the stock becoming obsolete by changes in demand and forecasting errors. If
a manufacturer can increase its flexibility by focusing its factories around small lot
sizes, shorter lead times and fast order processing, it will find retailers willing to pay
higher prices.
The retailer’s economics are illustrated in Table 8.7. A retailer pays €25 for an item and
resells it for €50. The retailer’s inventories typically turn three times a year, giving the
gross margin return on investment of 300 per cent. However, if the retailer can receive
orders from the supplier a day or two after placing the order, the GMROI increases dra-
matically. If the manufacturer retained the original price, the GMROI would increase
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Questions
fourfold. In practice, retailers would normally be willing to pay more for a fast
response supplier that is providing both fresher merchandise and higher asset utilisa-
tion. The final column of Table 8.7 shows that the retailer could pay 20 per cent more
to the manufacturer and still increase its GMROI from 300 to 800 per cent. For a typi-
cal retailer this might mean doubling its overall return on capital employed.
Table 8.7
Manufacturer’s response Regular Rapid
Retailer’s
economics: regular
Price paid by retailer (€) 25 25 30
versus rapid
response Price paid by customer (€) 50 50 50
Gross margin (€) 25 25 20
Inventory turn 3× 12× 12×
Gross margin return on investment (%) 300 1,200 800
Summary
Pricing is the only element of the market mix that directly generates revenue; all the
others add costs. Pricing decisions almost invariably have the biggest impact on both
short- and long-run profits. In the short run, inertia among buyers invariably means that
price increases will substantially boost profits. But such a strategy is extremely dangerous
in the long run. Over the longer term, higher prices depend upon offering superior
perceived quality and value to both consumers and resellers.
Questions
1 A company has variable costs of 50 per cent and a 5 per cent net profit margin. What is
the effect of a 5 per cent price increase, first under an assumption that no volume is lost,
and second under an assumption that 10 per cent volume is lost?
What effect will a 5 per cent price cut have, first if volume is unchanged, and second if
volume increases by 10 per cent?
2 Poorly trained sales people often allow buyers to squeeze them down too easily on price.
Why is this?
3 What factors should be taken into account in deciding between a penetration and
skimming pricing strategy?
4 An industrial goods company has seen prices being gradually eroded by competition for
several years. Suggest some approaches it could consider to avoid having to cut prices
further.
5 Under what circumstances is EVC likely to be a useful pricing technique?
6 Show how value chain analysis may be used in developing a pricing strategy.
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Notes
1. For an analysis of how skimming and penetration pricing impact on shareholder value see
Peter Doyle, Value-based Marketing: Marketing strategies for corporate growth and shareholder
value (Chichester: Wiley, 2000)
2. Dick Wittink, Marco Vriens and Wim Burhenne, ‘Commercial uses of conjoint analysis in
Europe’, International Journal of Research in Marketing, January 1994, pp. 41–52.
3. George Stalk and Thomas M. Hout, Competing Against Time: How time based competition is
reshaping global markets (New York: Free Press 2003).
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‘Advertising doesn’t
doesn't
create a product advantage.
It can only convey it.’
Bill Bernbach, Founder DBB
(now part of Omnicom)
Chapter 9 COMMUNICATIONS STRATEGY
This chapter looks at what managers need to know to guide the development of a suc-
cessful communications strategy. Since much of the work is highly specialised or
technical, most companies use outside agencies to help implement their advertising,
promotion and public relations policies. But managers cannot abdicate their responsibili-
ties for communications. The decisions are too important and the costs (typically 15 per
cent or more of turnover) are too significant for top management not to get involved.
Management must accept responsibility for setting the communications objectives,
determining the budget, allocating expenditures among alternative communications vehi-
cles, agreeing strategy with their agencies, and evaluating the results of the campaign.
To undertake these tasks, managers need to understand how communications work and
what the alternatives are.
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Chapter 9 Communications strategy
Introduction
It is not enough to have good products and services. To generate sales and profits,
their benefits have to be communicated to customers. Marketing communications is
the process of transmitting messages with the objective of making the organisation’s
products or services attractive to target audiences. The two most important audiences
for marketing communications are customers and the trade, but the audiences com-
municated to can also be employees, shareholders, government bodies and
community groups that the organisation may wish to influence favourably towards
its activities.
There are several reasons why managers want to communicate to these markets
or audiences:
■ Inform. Management may need to make the audience aware that the company’s
product or service exists, and to explain exactly what it does. Such tasks are obvi-
ously important for new products and services.
■ Persuade. A further stage is creating favourable attitudes to the company or its
brands. Management will seek to persuade customers and the trade that the brand
has benefits which are superior to those of competitors.
■ Image creation. In some markets, the image created by the firm’s communications
will be the sole or main differentiator among brands. The lager market is one
example of the importance of image creation. All mainstream lagers are similar
products, and the low temperature at which they are served today masks any dif-
ferences that may exist. In blind product tests, drinkers cannot discriminate
between them. Instead they talk about their preferred brands – Carlsberg,
Heineken or Stella Artois – in terms of the slogans, symbols and actors used in the
advertising. The communications – the images, confidence and attitudes created –
become the brand. In such markets, where the products are so simple and similar,
communications-created images provide consumers with the only means to differ-
entiate.1 Effective communications becomes the key to market share.
■ Reinforcement. Much communication is aimed not at winning new customers,
but at reassuring existing ones that they have made the correct choice. For most
established businesses, retaining existing customers is more important to future
sales than winning new ones. Effective communications reinforces current cus-
tomers by reminding them that their brand is still reliable, relevant and good
value. Without them, customers would be seduced by other brands offering new
benefits and values.
Marketing communications normally covers personal selling, media advertising,

direct response marketing, sales promotion and public relations. The relative impor-
tance of these items varies from country to country depending upon media
availability and local regulations. The pattern for the UK is shown in Figure 9.1.
Personal selling costs are the largest element, followed by sales promotion and media
advertising. The most rapidly growing medium is direct response, with the Internet
and online marketing growing in importance.
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Introduction
Sales promotion
£14bn
Direct response
£5.0bn
PR
£2.0bn
Advertising
£13bn
Figure 9.1
The UK Personal selling
communications £20bn
mix, 2000
Two other forms of communication need to be noted in addition to these specific

communication tools. First, the product’s appearance, its price and how it is dis-
played, sold and serviced by the company’s staff all communicate to customers.
Thus, the whole marketing mix, not just the communications mix, needs to be
co-ordinated. Second, communications do not have to be paid-for promotional
activities. Word of mouth is a very powerful communications vehicle. If you have a
brilliant product or service, people will learn about it anyhow, and they will not need
persuading to buy it.
However, there are two reasons why personal experience and word of mouth need to
be supplemented by a professional communications programme. First, personal expe-
rience and word of mouth are too slow for building a market. Without a professional
communications programme, it may take generations before the product becomes
well known. By then competitors will almost certainly have copied it, or its features
will have become obsolete. Second, many companies have products or services that
are non-unique. Effective communications can be a means of creating this difference.
Successful communications can add value for customers, the trade and other stake-
holder groups.
In the next section, the ways in which organisations send and people receive mes-
sages are shown, along with their implications for marketing. The chapter then
explores how plans are developed for advertising, direct response, sales promotion
and public relations. The next chapter discusses the complementary activities of per-
sonal selling.
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Communications and buyer behaviour
The communications process

Communication is defined as the transmission and receipt of a message. For commu-
nication to take place, two parties have to be involved: the sender and the audience.
If the audience does not pick up the message sent out, no communication takes
place. The effort and expense have been wasted. Unfortunately, wasted communica-
tion is a major problem in marketing. The nature of the communications process and
the problems that occur are illustrated in Figure 9.2.
The communications process starts with a sender that wants to communicate a mes-
sage to an audience. The sender could be a salesperson calling on a potential
customer or a firm sending a message to millions of consumers through an advertise-
ment. The sender has to put the intended message into words, pictures or symbols
that can be transmitted. This is technically called encoding. The encoded message is
then transmitted through a medium such as a television advertisement or a letter
mailed to a client. If the audience receives the message, it is then interpreted (or
decoded). The audience may then respond in some way. Finally, there is feedback,
which is the information that the sender obtains about the audience’s response.
The construction and transmission of the message form the communications plan.
Whether the message is received and how it is interpreted by a member of the audi-
ence form the perceptual process. In framing the communications plan, two major
problems have to be anticipated in the perceptual process: obtaining attention and
achieving a correct interpretation of the message.
Attention
For an advertisement or other communications message to be effective, it must
achieve first exposure and then attention. Selecting the right media is crucial because
Coded Decoded
Sender Media Audience
message message
Noise
Figure 9.2
The
Feedback Response
communications
process
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of the exposure problem. Many messages are simply not seen by large sections of the
target audience. People see only a fraction of the newspapers, web-sites and maga-
zines published, they miss all or large parts of most television programmes, and never
drive past some billboards. Then, even if the person is exposed to an advertisement
or message, no attention may be paid to it as it is viewed as boring or irrelevant. An
average person is estimated to see over 500 advertisements a day, but pays attention
to only around 10 per cent of them.2
What determines whether a message receives this selective attention? Research shows
that it depends first upon the characteristics of the audience and second upon the
impact of the message. The main factors are as follows:
■ Messages of practical value. If customers are in the market for the product, they are
more likely to pay attention to the information conveyed in the message.
■ Messages that are consistent. People look for information that justifies recent
buying decisions. New car buyers, for example, are the most avid readers of adver-
tisements for the car they have bought. Psychologists call this phenomenon
cognitive dissonance reduction.
■ Messages that interest. If the communicator knows what interests the target audi-
ence, it can capture attention by reflecting these interests in the message.
■ Messages that are new. People pay more attention to messages that announce
fresh news about the brand or the company.
■ Messages with impact. Besides gearing the message to the interests of the target
audience, attention can be increased by spending more to convey the message and
enhancing the creativity with which it is expressed. For example, impact is
increased with the size of the message, the use of colour and movement, the cre-
ativity with which it is expressed, and the purchase of prime positions in
newspapers and TV programmes.
Interpretation
Even if the message gets through the attention filter, it may be misinterpreted by the
receiver. People have their own set attitudes that lead to expectations about what a
message should say about an object. They see what fits into their belief system,
ignore things that are discordant, and add things which are consistent to the beliefs.
Many well-known and trusted brands use advertising with messages that are pur-
posely incomplete. They leave the customer to ‘fill in’ the advertising message,
believing that this will create more interest and involvement.
How people interpret a message is influenced by three factors:
■ Needs. The greater the need, the more value is placed on a product that may sat-
isfy it. A message about a food product is likely to be more carefully interpreted if
seen immediately before dinner than just after.
■ Values. Words and expressions that are familiar are more likely to be interpreted
correctly than those which are unfamiliar.
■ Group pressure. People tend to interpret messages in the same ways as other mem-
bers of their group. People generally seek to conform to their peer groups.
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The communications tasks, then, are to choose media that achieve high exposure of
the target market segment and to develop messages that are noticed, remembered
and interpreted in an unambiguous fashion.
The response process

The objective of the communicator is to get a response from the audience. In market-
ing, the ultimate response the firm normally wants is to get customers to try and
then repurchase the brand. However, measuring the effectiveness of communications
in terms of sales results is usually fraught with difficulty. There are two main prob-
lems. The first is that sales depend upon many other factors besides the
communications efforts of the firm. It depends upon external factors such as the
buoyancy of the market and the activities of competitors. It also depends upon other
components of the marketing mix, such as the quality of the product, the efforts of
the people selling it, its price and the firm’s ability to obtain distribution. Second,
communications activities usually have lagged effects. Successful communications
affects not only immediate purchase decisions, but decisions far into the future. This
is because some customers will remain loyal and repeat buy. In addition, satisfied cus-
tomers will tell others. Consequently, immediate sales effects will generally
substantially underestimate the effects of a successful communications campaign.
As a result, communications effects have tended to be judged on intermediate vari-
ables. These are variables such as brand awareness or attitudes to the company, which
are more directly associated with the communications message and that ultimately
should lead to sales increases. In rationalising the use of these intermediate variables,
several researchers have postulated what are usually termed hierarchy of effects
models.3 These models make the intuitively appealing argument that communication
works by moving the customer through three phases: first, a ‘learning’ phase (aware-
ness, comprehension); then a ‘feeling’ phase (attitudes, preferences); and finally an
‘action’ phase (trial, repurchase). The advantage of setting communications objectives
in terms of these intervening variables is that they are more clearly a consequence of
communications than ultimate sales. Managers responsible for communications can
therefore be held more responsible for achieving results on these measures. In addi-
tion, they are normally easy to measure both before and after a campaign.
Figure 9.3 presents a model for judging the effectiveness of a communications cam-
paign. The hierarchical variables are presented vertically along with some common
measures. The elements of the communication plan are presented horizontally. The
first task of management is to define the communications objective. For a new prod-
uct this might be achieving defined levels of awareness and interest. Later the
objectives may well shift to creating positive attitudes and trial. Then, management
will need to develop a communications plan to achieve the given objective.
Each element of the communications mix has a particular role. The choice of media
has the key role in achieving the awareness objective. Management will choose the
media mix that maximises the number and frequency of exposures for a given
budget. The message is crucial for generating interest among the exposed audience.
The creative use of copy, colour, novelty, humour and movement can all enhance
the interest in the message. The quality of the message is also crucial to get the audi-
ence to comprehend the information about the product. Attitudes are influenced
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Hierarchy Measures Source Message Media Market
Awareness Recall
Interest Attention
Comprehension Knowledge
Figure 9.3
Attitude Preference
Hierarchy of
effects and the Action Purchase
communications
plan
particularly by the credibility of the source. A product endorsement by a leading

authority of known independence will have a positive effect. Action is likely to result
when the audience is correctly targeted. For example, with a really new product, it is
necessary initially to target opinion leaders rather than the ultimate mass market.
The former provide the product endorsement and word-of-mouth influence neces-
sary to encourage adoption among others in the market.
The last point highlights the importance of seeing the communications process as a
whole. A message may be successful in achieving high awareness, but ineffective in
producing results because it is not understood, not credible or hits the wrong target
market segment. Analogously, a message may achieve low general awareness but be
highly effective on the few prospective customers who are in the market at the time
it is presented.
The matrix of Figure 9.3 can be used to evaluate a company’s communications cam-
paign. A simple 0 to 5 score can be given for each variable to indicate how well it
contributes to each step in the hierarchy of effects. The resulting profile will indicate
the strengths and weaknesses of the campaign and suggest areas for improvement.
For example, a humorous advertisement message might score well on creating inter-
est in the product, but score badly in generating comprehension and positive
attitudes to it. Similarly, a particular media mix may do well on the awareness vari-
able, but poorly on action because it is oriented to the wrong target market.
Buyer behaviour
Marketing communications seeks to influence buyer behaviour. To see the scope of
this influence and how it is best directed, the nature of buyer behaviour needs to be
understood. There are three key questions that management needs to study. First,
what influences buyer behaviour in their market; second, who influences buying deci-
sions; and third, how do buyers make decisions?
Buyer motivations
Buyers – either consumers or industrial buyers – are influenced by two types of factor:
social and commercial.4 Social influences are the most important and are largely out-
side the control of the firm. The commercial influences are those marketing tactics
that the firm and its competitors employ to influence buyer behaviour.
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There are four broad social factors that play a key role in influencing what people
buy. These are as follows:
■ Cultural factors. The products people buy and how they respond to communica-
tions are heavily influenced by their culture, nationality, religion, race, location
and social class. Asians still have different aspirations from Europeans. Upper-class
people, not surprisingly, have innate values, preferences and behaviour that are
significantly different from those of the rural working class.
■ Social factors. Attitudes and behaviour are also influenced by reference groups,
family, role and status in society. Reference groups are people with whom one
interacts. These may be co-workers, friends or professional groups. Most people
want to ‘fit in’, so reference groups create pressures for conformity. A group of
teenagers will aspire to the same brand of running shoes. Academics in a particular
discipline tend to publish articles in the same journals and attend the same confer-
ences. A person’s place in a social group is defined in terms of role and status. A
job involves a role in the organisation together with a status level. People tend to
choose products to communicate their status. Such status symbols include cars,
clothes and electric gadgetry. For example, a manager will seek to look different
from a front-line employee.
■ Personal factors. Buying decisions are also influenced by individual factors. The
most important of these are the person’s age, occupation, income, personality and
lifestyle. People buy different types of product as they get older. Richer people tend
to buy different goods and brands than poorer. Extrovert types often buy different
products than introverts.
■ Psychological factors. Psychological factors have a major influence on the percep-
tual process. Psychologists such as Freud, Herzberg, Maslow and Dichter have
developed various theories of motivation. The most widely quoted one in market-
ing has been Maslow’s hierarchy of needs. Maslow postulated that an individual’s
needs are satisfied in order of importance. The most basic needs are physiological –
for example, the need to satisfy hunger and thirst. Once these are satisfied, an
individual tries to meet the other needs. These are in turn safety, social needs,
esteem and finally self-actualisation (see Figure 9.4). In affluent western societies,
marketers would assume that esteem and self-actualisation are common needs
affecting product and brand choices.
These four social forces are major influences on the perceptions, preferences and
behaviour of buyers. The second set of forces motivating buyers are commercial. These
are the marketing activities that firms engage in to attract buyers. They are incorpo-
rated in the firm’s marketing mix – the design of the product, its price, the services
that augment the product, how it is distributed, and finally how its values are com-
municated to the audience. The key is to develop a marketing mix and a
communications campaign that are consistent with the social, cultural, psychological
and individual forces shaping the expectations of the target audience. Messages that
offer benefits and information discordant with people’s fundamental beliefs and aspi-
rations are not going to be effective. Managers therefore need to study the social
environment of their target markets.
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Self-
actualisation
needs
(self-development
and realisation)
Esteem needs
(self-esteem,
recognition, status)
Social needs
(sense of belonging, love)
Safety needs
(security, protection)
Physiological needs
Figure 9.4 (hunger, thirst)
Maslow’s hierarchy
of needs
Buying roles
In simple, routine buying situations it is usually easy to identify the buyer. But in
more complex buying there is often no single customer, rather there is a decision-
making unit. When a firm buys computers or a household purchases a car, many
people may be involved.
Five buying roles can be distinguished (Figure 9.5):
■ Initiator – the person who first suggests buying the product or service.
■ Influencer – a person who advises on the buying decision.
■ Decider – a person who makes the choice on a component of the buying decision:
whether to buy, what to buy, how to buy it, or where to buy it from.
■ Buyer – the person who makes the actual purchase.
■ User – the person who uses the product (the consumer).
Marketing management needs to understand the decision-making unit, since it will

be a key determinant of the communications plan. How shall the communications
message be structured? Who should it be targeted to? For example, 70 per cent of
women’s perfume is bought by men! Should perfume advertising then be targeted to
men and positioned in media read mainly by men? The answer is probably not.
Research suggests that the male buyer usually finds out what his partner normally
uses or would like. If in doubt, he asks advice from shop assistants or colleagues
(influencers). In large industrial buying decisions, the decision-making unit can be
extremely complex with many different functions being involved and interactions
taking place between them over an extended period. Understanding the nature of
these networks and interactions is crucial for effective marketing and communica-
tions planning.
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User
Buyer
Initiator
Decider
Figure 9.5 Influencer

The decision-making
unit
Types of buying behaviour

There are different types of buying decision. Buying a house is very different from
buying a newspaper. For a business, buying a factory is quite different from buying
stationery. Complex, infrequent and expensive purchases are likely to involve more
detailed analysis of information and more participants in the decision-making unit.
Different types of decision imply different types of communications strategy.
A characteristic of most business and household customers is repertoire buying.
Particularly for items that are purchased frequently, most customers are not brand
loyal; they buy within a repertoire of four, five or six brands. A consumer might buy a
Mars Bar one day, a KitKat the next and Snickers the day after; or might even buy
them all together. Brand preference is therefore a relative phenomenon and creating
it is more about getting the brand included in the customer’s repertoire and then
nudging them to choose it slightly more often. But generally the brand chosen on
any particular occasion may be driven by habit, availability, the desire for a change, a
price promotion or a particular need. The company’s communications can very rarely
create a truly loyal customer.
Buying decisions can be classified on two criteria:5
■ Degree of customer involvement. Customers are likely to be highly involved in the

purchasing decision where purchases are infrequent or involve large amounts of
money, or where a mistake poses a significant economic or social risk. High-
involvement products are industrial capital equipment and consumer durables.
But highly visible, status-oriented products such as sportswear or whisky, and new
products tried for the first time, also attract high involvement. Conversely, low-
involvement decisions – where little thought goes into the purchasing process –
are mainly items that are frequently purchased, which are low cost and where
there is little risk. Most grocery products fall into this group.
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■ Degree of customer rationality. A decision is ‘rational’ if choice is based primarily on

the perceived functionality of the product. Most industrial buying is rational. So
are most purchases of consumer items such as washing powder, petrol and life
insurance. Subjective or ‘irrational’ decisions are those made on the basis of taste,
feelings or image. Perfumes, lagers, confectionery and sports cars normally fall into
this category.
Using these two dimensions, purchases can be put into a six-element matrix (Figure
9.6). Most industrial decisions fall into the high rationality or ‘thinking’ column.
Many, though certainly not all, consumer decisions fall into the low rationality or
‘feeling’ column. Each type of decision implies a different style of perceptual process
and consumer learning. Correspondingly, each suggests a different approach to devel-
oping a communications strategy.
■ Extensive problem solving. For infrequent, expensive and risky decisions, customers
search for information and seek to make rational choices. The hierarchy-of-effects
model is an apt description of the perceptual process for this type of buying.
Customers need first to learn about the product, and then to develop positive pref-
erences before a considered choice is made. Here effective communication requires
researching the performance needs of target customers. Since buying is rational,
the message should feature product performance and economic benefits. Given
Rationality
High Low
(thinking) (feeling)
Extensive
High problem Image
solving
Degree of Limited
involvement Medium problem Sensual
solving
Low Routine Impulse
Figure 9.6
Source: Adapted from Richard Vaughn, 'How advertising works: a planning model', Journal of Advertising Research,
Six types of buying
October 1980, p. 30. Copyright © by the Advertising Research Foundation
behaviour
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the high involvement of customers, they are more likely to expect fuller and more
detailed information in the communications message. For these difficult decisions,
the message is also important in the post-purchase stage to reassure customers that
they have made a wise choice.
■ Limited problem solving. Here the buyer is familiar with the product category and is
not inclined to do much more information seeking. However, the buyer’s rational
attitude predisposes them to notice dramatic claims or promises. The key here is to
develop a simple, powerful message (often called a USP or unique selling proposi-
tion). If the message is too complicated, it is unlikely to be decoded or remembered.
If the message is persuasive, the customer is likely to act rationally and try the brand.
■ Routine problem solving. When a product is bought very frequently, it requires little
consideration. Habit, based on successful experience, is the main determinant of
choice. Breaking this routine to introduce a new product is a tough marketing task.
For example, of the 23 leading grocery brands in 1923, 19 were still number one
after 75 years and the other four were still in the top five!
For these products, the hierarchy-of-effects model does not apply. Customers do not
want to learn about new products. They screen out information that is inconsistent
with the current routine. For the brand challenger, research suggests that the best
way to change habit is to force new behaviour. Free offers, samples, price cuts and
other promotions are better than advertising for such a task. Once people have suc-
cessfully tried the brand, cognitive dissonance theory suggests that customers may
change their attitudes to make them consistent with the new behaviour. In contrast
with the hierarchy-of-effects model, in routine buying decisions, attitude change fol-
lows behavioural change. For the market leader, the task is to bolster habitual buying
against the promotions of competitors seeking to stimulate new behaviour patterns.
■ Impulse decisions. On the low rationality or ‘emotional’ side of the matrix, the
lowest consumer involvement category is impulse buying. Here the consumer sees
a brand in a store and tries it on the spur of the moment. But even if the product is
satisfactory, it does not guarantee repurchase. Brand switching occurs for the sake
of variety rather than through any dissatisfaction with the previous product. For
these items (e.g. soft drinks, confectionery), distribution is often the key marketing
variable. Market leaders try to switch impulse buyers to routine buying by domi-
nating the shelf space and investing in frequent reminder advertising. Since
buying is not based on rational factors, communications rely on using a strong
creative idea, rather than on factual information. Challengers, on the other hand,
seek to encourage impulse buying by offering lower prices, deals, samples and
advertising that promotes reasons to try something new.
■ Sensual decisions. Here buying decisions are based on the desire for pleasure rather
than on any rational assessment of the product’s features. Many advertised brands
fall into this category: biscuits, desserts, drinks, complete meals, ice-cream, etc.
The task of the communications message is to convey this pleasure through sen-
sual images and fantasies.
■ Image decisions. Image decisions are high on involvement and low on rationality.
These occur where the consumer sees the product as reflecting status or personal-
ity. Perfume, whisky, cars and branded sportswear are examples. The
communications tasks are to discover an image that appeals to the target segment
and to find a subtle way of presenting the appropriate associations.
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Advertising planning
General implications
What implications do these theories of communications and buyer behaviour have
for managers who are charged with developing communications policies?
■ Most marketing communication is ineffective. Customers are bombarded with so

many messages and promotional stimuli that most communications are wasted. As
Lord Leverhulme, once head of Unilever, is alleged to have said: ‘Half my advertis-
ing is wasted – but I do not know which half.’ Most communications are not seen
by customers, or, if seen, are not noticed. Of the small percentage that are noticed,
many are misunderstood or perceived by customers in a distorted fashion.
■ High investments or highly creative communications are necessary to achieve an impact.
To overcome the noise in the communications system, the message needs to be
exceptional in either weight or creativity. Communications impact is normally a
function of the size of the presentation, its frequency, novelty and creativity.
■ Communications must be matched to the interests of the target audience. Customers
notice messages that provide information in which they are interested. Messages
that do not fit their social circumstances or individual needs are filtered out.
■ Communications work in different ways for different types of buying decision. For
rational decisions, where the customer is highly involved, the classic hierarchical
learning process occurs: awareness has to be created for a new product, compre-
hension built and preference stimulated before action is taken. For other decisions,
where the functional differences between products are imperceptible or subjective,
the buyer chooses on the basis of ‘feelings’. Here the task of communications is
often to provide the images that are the only differentiator among products. For
low-involvement decisions, behaviour often has to be triggered before attitude
change occurs.
■ The type of communications mix will vary with the type of buying behaviour.
Promotions (e.g. free samples) that can trigger direct behaviour change have an
important role in low-involvement decisions. For highly rational, high-
involvement decisions (extensive problem solving), personal selling is more likely
to be effective in dealing with the buyer’s information requirements. Advertising
has an obviously important role in decisions based upon emotional responses.
■ Marketing communications are more powerful in creating brand switching than in gener-
ating category sales. Sales of a product category (e.g. cigarettes, computers) are
usually determined by social factors such as the cultural, income or psychological
background of the customer. The role of marketing communications is highly con-
strained. Instruments of communications such as advertising and sales promotion
tend to affect brand decisions within the product category.
Advertising is the most visible, although no longer the largest, component of the
communications mix. In per capita terms, the Americans and the British spend the
most on advertising, the Spanish, Greeks and Portuguese much less (Table 9.1).
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Table 9.1
Distribution by media (%)
Advertising USD
expenditure per per cap Newspapers Magazine Television Radio Cinema Outdoor
capita, 2003
USA 457 33 11 40 13 3
UK 329 41 15 31 4 1 7
Austria 279 44 19 22 7 1 7
New Zealand 269 39 11 34 13 1 3
Belgium 262 31 13 39 10 1 6
Japan 246 27 10 46 5 12
Australia 236 41 8 37 10 1 4
Germany 218 44 19 27 4 1 5
Sweden 216 56 13 23 3 0 5
Canada 199 40 8 36 13 4
France 175 25 23 32 8 1 11
Portugal 155 14 16 57 5 1 7
Greece 146 19 35 42 4
Spain 143 30 11 42 9 1 7
Bulgaria 41 19 6 61 14
Croatia 14 16 11 65 8
China 2 19 2 75 1 3
Sources:
http://0-www.warc.com.pugwash.lib.warwick.ac.uk/Search/Adspend/Default.asp
http://www.geohive.com/cd/index.php
Advertising is defined as the paid presentation and promotion of products or services

through mass media such as television, radio, newspapers and the Internet.
The steps in developing an advertising programme are outlined in Figure 9.7.
Identifying the target audience

As with all marketing decisions, advertising starts with the segmentation of the
potential market to identify the key target segments. Most advertisements aim to per-
suade customers that the product or service featured will meet their needs and offer
them value. The characteristics of the target segment should determine what the
Identify and Define Determine

research the advertising advertising
target market objectives budget
Develop Create Evaluate

Figure 9.7 media advertising advertising
Planning an plan message effectiveness
advertising
campaign
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advertising will say, how it is presented, when it is shown and the media chosen to
display it.
Advertising planning therefore starts with an analysis of the market. There are three
central steps:
1 Segmentation of the market. The heterogeneous market has to be broken down into
customer groups that are similar in needs. Different customer groups have differ-
ent expectations and so require different types of communication. Businesspeople
have different travel needs to tourists; hospital specialists want different informa-
tion from pharmaceutical companies to GPs; speciality business want different
types of product support to commodity businesses.
2 Assessing the potential of the different segments. Companies then have to choose
which segment or segments to focus on. This depends first on the attractiveness of
the segments: their size, growth, profitability and competitiveness. Second, it
depends upon where the company is in the best postion to develop a competitive
advantage. Which segments would most value the firm’s products and expertise?
3 Analysing needs and behaviour. An advertising message will work when it is in tune
with the culture of the target audience, is interesting to them, and presents a solu-
tion to their needs in a persuasive way. To develop a message and a media plan,
the advertising agency will need research on the needs of the target audience, the
nature of the decision-making units, and when and where they buy.
Determining advertising objectives
Next it is necessary to define objectives. This is particularly important for advertising

because, given the technical nature of much of the planning, most of the campaign is
usually developed by an outside professional advertising agency. The agency will usu-
ally be delegated to organise the research, create the message and propose the media.
In these circumstances, it is important for the agency and the client to agree objec-
tives. Objectives serve several purposes. First, they provide for effective
communication and co-ordination between the client and the agency. Second, they
provide a criterion for decision making: for choosing between alternative advertising
plans. Third, they provide the norms with which to evaluate the campaign when it
has been completed.
To serve these purposes, objectives must be specific, measurable and operational.
Specific means that the sales or communications objectives should be clearly defined.
Measurable means that numerical goals, achievable in a specific time period, can be
established, so permitting subsequent evaluation of the campaign. Operational means
that the agreed objectives and results can be clearly related to the advertising employed.
Ultimately, the objective of advertising, as with all marketing investments, is to
increase the firm’s profits. It can do this by either raising sales or increasing prices.
Usually the objective of advertising is seen as increasing sales. Unfortunately, target-
ing sales as an objective normally fails the operationality test. It is difficult to
disentangle the effects of advertising from the many other factors influencing sales.
Second, for many types of buying behaviour, purchase is the end result of a long
process of consumer decision making. Current advertising, therefore, may not
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produce sales results until well into the future. Similarly, current sales may be the
result of awareness and positive attitudes to the brand built up by expensive and con-
sistent investment long ago.
Exceptionally, short-term sales may be a good measure of advertising effectiveness.
This occurs when advertising is the overwhelming determinant of sales and where
long-term carry-over effects are small. Perhaps the best example is direct response
advertising. Here a newspaper advertisement or mail shot is expected to get people
sending in orders immediately. After a week the advertiser knows whether the pro-
motion is a success or failure. Some retailer advertising – especially price-oriented
promotions – also aims at immediate sales.
Much advertising is defensive in nature. Its aim is often less to increase sales than to
maintain them by encouraging customers to continue buying the brand. The adver-
tising acts to reinforce customers’ existing beliefs and patterns of behaviour. If a
customer has bought a product and found it satisfactory, subsequently seeing an
advertisement confirms that judgement and increases the probability that it will be
bought again.6
Advertising’s role in achieving higher prices can also be important to a firm’s profit
performance. Leading advertised brands normally sell at prices substantially above
own-label and minor brands. Advertising supports this premium by reinforcing the
values of the brand to the consumer. But, as with sales objectives, it is difficult to dis-
entangle the effects of the advertising on the premium from the other factors that
play a role, such as its market share and positioning. Lagged effects also complicate
evaluation: changes in advertising are not likely to have much of an impact in the
short run.
For these reasons, advertising objectives are normally framed in terms of intermediate
communications goals that meet the criteria of specificity, measurability and opera-
tionality better than sales and prices. The first task is to benchmark where the
company or the brand is now along these communications measures. Figure 9.8 illus-
trates the situation for one brand of lager. Here the problem is obviously one of
attitudes. Most people knew about the brand, but only 35 per cent had positive atti-
tudes towards it.
Strategically, the brand can be compared to brand D in the awareness–attitude matrix
of Figure 9.9. Each brand in the matrix presents a different advertising problem.
Brand A has the best position. Customers know it and like it. The advertising task is
to reinforce this position. Brand B’s position can be greatly improved by advertising,
since it is a well-liked brand but more people need to be made aware of it. Brand C is
in the most difficult position, since it is not well known and those who know it do
not like it much. Brand D’s problem is the unfavourable attitudes towards it. It means
changing the product or changing the attitudes to it.
In this example, product research proved that there was nothing wrong with the
brand. In blind product tests it scored equal to the brand leaders – its real problem
was image. Its poor image led to a weak brand profile along the choice dimensions
mentioned by the customers.
The primary advertising objective was to achieve a measurable change in customers’
attitudes by creating a new image for it. The brand would be repositioned as a ‘cool’
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90%
86% Objectives
Aware
(aided)
60%
40%
40%
35%
30%
Positive
25% attitudes
Aware 20% 70%

Figure 9.8 (unaided) Intend to Repurchase
15%
Consumer buy Trial 50%
awareness and
attitudes to a brand
Attitudes
Positive Negative
High A D
Awareness
Low B C
Figure 9.9
Awareness–attitude
matrix
and fashionable drink, so creating an aura of popularity and success that would build
confidence of consumers in their choice. Objectives agreed for the campaign are sum-
marised in Table 9.2.
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Table 9.2
Now 1 year on
Setting advertising
objectives Market share (%) 7 10
Brand awareness
Unaided 25 40
Aided 86 90
Attitude rating 35 60
Intent to buy 20 40
Trial 15 30
Repurchase 50 70
Developing the message

Once decisions have been made about who the advertiser is targeting and what objec-
tives it wants to achieve, the next task is how to produce a message to achieve the
objective. The message has to meet two criteria. First, it must be presented in a way
that will attract attention. Given the low level of interest that consumers normally
have in advertisements and the hundreds of others competing for their attention,
this is a difficult task. Second, it must produce the desired type of perceptual or
behavioural response and not be misinterpreted or rejected. The audience should find
the message clear, believable and motivating. Again this is a tough job, given the
brief attention scan that the message is likely to receive.
The creative department of the advertising agency, which will normally be responsi-
ble for developing the message, will work on four aspects – content, structure, format
and source.
Message content
Content refers to the appeal the advertisement will employ to motivate the
customer. Figure 9.6 suggests that there are two broad types of appeal: rational and
emotional. Rational appeals focus on the functional benefits of the product. They
seek to persuade customers of its superior performance, lower cost or better value.
Where buying decisions are predominantly rational – industrial buying, expensive
consumer durables and functional items – this is the obvious type of appeal to
motivate consumers. Emotional appeals seek to evoke positive feelings about the
brand to motivate purchase. These appeals work where there are no real differences
between products and when brands are bought for personal indulgence or image pur-
poses. Watches, cigarettes, beer and cosmetics are obvious examples where emotional
appeals are relevant.
Emotional appeals can be split into positive and negative. Positive emotional appeals
include humour and the promise of success, beauty or happiness. Negative appeals
include fear, guilt and shame. The latter are often used in anti-smoking, drink-driving
and insurance advertising. Research suggests that excessive use of negative appeals,
particularly the use of fear, can discourage people from looking at the message and so
be counterproductive.
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Message structure
The effectiveness of the message depends upon how it is said, as well as what is said.
Several aspects of message structure have produced useful research findings. First,
should the advertisement state a definite conclusion (e.g. ‘Volvo is the safest car in the
market for families’) or should the receiver be allowed to draw their own conclusions
from the advertisement’s appeal? The research suggests that, where the customer is
likely to be interested in the area, it is advantageous to leave the conclusions
unstated. This tends to trigger more involvement and motivation to think about the
brand. Stating conclusions is more appropriate where the target segment is less likely
to be motivated or would be incapable of determining the appropriate conclusion.
Other researchers have looked at whether one-sided or two-sided arguments should
be used. That is, should some of the negatives of the product be set alongside the pos-
itives? (e.g. ‘Using Sensodyne dental floss does take extra time but …’). The research
suggests that two-sided arguments work better for educated audiences and where
people are not initially positive about the product.
Comparative advertising – where the brand is compared against another specific brand
in the product class – has been a growing phenomenon. There are no simple answers
about the relative effectiveness of comparative advertising. In general it works best
for unknown brands or brands with a small market share that are seeking to chal-
lenge the leaders. It is less attractive for brand leaders, which will not in general wish
to encourage comparisons or publicise smaller rivals.
Message format
The format of the presentation depends upon the media used: TV, press, radio, bill-
boards, Internet, etc. Format includes copy – the verbal portion of the advertisement;
artwork – the illustrations used; and layout – the physical arrangement of headlines, sub-
headlines, copy, illustration and brand identification. The creativity with which the
elements are put together has a major impact on the effectiveness of the advertisement.
One clear research finding is that ‘a picture is worth a thousand words’. People’s
attention is almost invariably engaged more by the picture in an advertisement than
by the headline or copy. Furthermore, people have an enormously greater ability to
recall pictures than words. Pictures too are more flexible. A picture can say things
that stated verbally would sound pretentious, absurd or impossible. An important
area of research at the moment is just why people can remember pictures with such
extraordinary facility.7
Message source
All advertisements feature a source that is perceived to be the spokesperson of the
brand. The source in the advertisement may be the company itself, the brand name
or the actor who endorses the product. Research shows that the effectiveness of a
source depends upon its credibility and attractiveness. Credibility means the degree to
which the source is perceived as being an expert with respect to the product and is
unbiased in the claims being made for it. Credibility is lost if the audience believes
that the expert is being paid to make the claims about the product. A credible source
will greatly enhance the effectiveness of the advertisement.
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The second factor affecting the source’s effectiveness is its attractiveness.

Attractiveness is the receiver’s perception of the prestige of the source, the degree to
which the source is similar to the receiver, and his or her physical or personal attrac-
tiveness. Top sportspeople and film stars are not surprisingly often seen as attractive
sources. A reputed brand name is also an attractive source.
Ten commandments
Dr Dieter Steinbrecher, a German authority on advertising, after reviewing hundreds
of advertisement tests, offered ten commandments that successful advertising mes-
sages usually obey. He suggested that these can be used as a checklist by managers to
evaluate their company’s advertising messages:8
1 Attract attention. The advertisement must be sufficiently impactful to attract the

attention of the target market. This is indispensable: without being perceived
there can be no response. But attracting attention is only a necessary condition
and not a sufficient one for advertising effectiveness. An advertisement can
attract attention but irritate the customer and actually deter purchase.
2 Visual clarity. The advertising, its copy and illustrations must present a clear
‘gestalt’ or visual whole. Its central meaning must be clear and understandable
even after a quick viewing. Muddled and complex advertisements do not get
through the perceptual barriers.
3 Concentration. An advertisement should not claim more than one or two central
benefits. Advertisements that are overloaded with information cannot be
retained and stored by customers. The search for a unique selling proposition
(USP) is often a powerful advertising discipline.
4 Comprehension and credibility. It is important that the message is understood. The
advertisement should speak in the language of the customer and the images
should be within the horizons of the customer’s experiences. For example, studies
have been shown that businesspeople do not understand the highly scientific
language used in advertisements for electronics and telecommunications compa-
nies. Credibility here means that the claims look reasonable to the client.
5 Positive emotions. An advertisement should be tested to confirm that it evokes
positive feelings towards the product or company. If it generates negative or neu-
tral feelings, customers are likely to avoid looking at it.
6 Unity of style. The style of the advertisement should match the style of the brand.
A brand with solid functional benefits should have these reflected in the adver-
tisement’s presentation. Similarly the emotional images of the brand and the
advertisement should be in concert.
7 Constancy of style. The style of the advertising should be maintained over a long
period to retain and enhance the message. Brand managers are often too quick to
change advertising or the advertising agency radically. They believe that because
they are bored with the advertisement, customers are too. They forget that cus-
tomers are a lot less interested in the advertising than they are. Frequent and
abrupt changes in advertising erode the brand’s image and confuse the market.
8 Match the client’s world. Communications start with the receiver not the sender.
To be effective, the message must match the reality of the receiver’s world. Does
the message reflect the environment and ideals of the customers? Customers in
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different international environments may require different messages. A message

that is extraneous to the client is likely to be misunderstood and rejected.
9 Differential advantage. The advertisement should convey a clear competitive
advantage. It should give the customers a reason why the product or service
should be preferred to others in the market. If it looks the same or no better than
other products, then the money promoting it will be wasted.
10 Images rather than words. Research has clearly shown the superior impact of images
over words for conveying complex messages. This is especially true for advertising,
where the receiver normally reserves only a few seconds for looking at the message.
Pictures need less time to be transmitted and they are better understood.
Advertising messages should always be pre-tested before they are transmitted.

Research agencies have developed a variety of techniques for measuring the ability of
an advertisement to attract attention, build understanding of the product, change
attitudes and create an intention to buy. These involve customers viewing alternative
advertisements and having their reaction to them tested. While pre-tests are not per-
fect, they do allow the advertiser to obtain rough indications of effectiveness.
Determining the budget

Determining how much to spend on advertising is a very difficult problem. The
amount that should be spent depends upon two factors: the free cash flow generated
from additional sales and the shape of the advertising–sales response curve.
Unfortunately, while the former can generally be estimated, the latter is virtually
impossible to measure. Consequently, decisions rely heavily upon judgement.
Advertising decisions in practice appear to rely on rules of thumb that have very little
justification. Managers tend to follow one of four methods:
■ Percentage of sales method. The most common method is to set advertising at

some percentage (e.g. 2 per cent) of current or anticipated sales. This provides
management with a stable measure, but very little else. There is no rationale for
the percentage chosen (except tradition) and there is no effort to consider whether
a higher or lower amount would be more profitable.
■ Competitive parity. Another approach is to spend the same percentage as competi-
tors in the industry. This gives managers the illusion of safety in numbers: that the
collective wisdom cannot be far wrong. Again, however, there is little rationale for
this approach. Firms differ in their market opportunities and profit margins, so
that significant divergences should exist in a market. Those with better products
and higher margins should spend more.
■ Affordable method. Another common method is to base spending on what the
company thinks it can afford. If it is exceeding its budgeted profit, then marketing
managers are allowed to spend more on advertising and promotion. Again there is
no logic in this approach. Changes are not related to the profit opportunities that
can be exploited by advertising.
■ Objective and task approach. This purports to be more scientific. Management sets
a sales target, then the awareness, reach and frequency levels needed to achieve
the target are estimated and costed. Unfortunately the science behind this
approach is largely illusory since it relies on untested links between communica-
tions objectives and sales and profit results.
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What managers are really interested in is employing advertising to increase profits.

Whether advertising is profitable in the short term can be estimated using break-even
analysis. For example, if a product has a contribution (price–unit variable cost)
divided by price of 0.5, then to justify an advertising budget of say €10 million, incre-
mental sales of €20 million are required, i.e:
€10m advertising budget
€10m advertising budget
Break-even = –––––––––––––––––––––––––
0.5 contribution margin
Judging whether such a budget would generate €20 million extra sales requires esti-
mating the sales response curve (Figure 9.10). There are two problems in practice.
One is that sales are affected by a myriad of other factors besides advertising. Second,
advertising has lagged effects. Today’s expenditure may affect purchases long into the
future. There have been three types of more or less scientific approach to overcoming
these problems: 9
■ Econometric methods. These are computer-based statistical techniques that attempt

to parcel out the effects of advertising from the variety of other factors affecting
sales. In principle, it is also possible for these techniques to measure the lagged
effects of advertising. Such methods normally rely on the analysis of past sales
data. In practice, there are several limitations with econometric analysis. First, it is
often difficult to get all the data needed to take into account other variables.
Second, there is often insufficient variation in advertising to get good estimates of
the response curve. Finally, there is a more general question about how valuable
estimates are of what happened in the past to predicting what will happen in
the future.
Sales
Figure 9.10
The advertising Advertising
response function
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■ Experiments and tests. Another method of isolating the effects of advertising is to

run an experiment whereby one region of the country gets a higher level of spend-
ing than others. Company sales then give an estimate of the incremental effect of
advertising. While such approaches may give insights, they again run into a host
of practical problems. How representative is the test and the test area? Is every-
thing else similar across the regions? Has the experiment lasted long enough to
judge any long-term effects?
■ Judgemental methods. More recently, techniques have been developed to elicit for-
mally the judgements of the managers most directly involved about the shape of
the response curve. Managers are asked to judge what sales level will be attained
with no advertising support, advertising at half the current level and advertising at
50 per cent more than the present level. Putting together the consensus estimate
allows a projection of the optimal level of expenditure. This is a promising
approach in that managers are forced to use their judgement and experience in a
rational manner. The downside is that the method is only as good as the collected
wisdom of those participating in the exercise.
Thinking about advertising in a rational manner does permit some useful generalisa-
tions about when and where advertising is likely to pay off:
■ The bigger the profit contribution margin, other things being equal, the more it
pays to advertise. If the margin is 67 per cent, only €1.5 million extra sales are
needed to justify a €1 million expenditure on advertising. If the margin is 33 per
cent, over €3 million sales are needed.
The other generalisations relate to the expected shape of the sales response curve:
■ New products are more likely to respond to advertising. Advertising can solve the
problem of the market’s initial lack of awareness and knowledge.
■ Fast-moving consumer goods are likely to respond more because the time-gap
between seeing the advertisement and being in a purchase situation is short.
■ Products with a differential advantage should be advertised. Customers have a
reason to switch to the product.
■ Advertising is more effective in larger markets. It is usually easier to meet an incre-
mental sales target of €3 million if the market is worth €300 million than if it is
worth €10 million.
Shareholder value approach to budgeting

The only rational method of determining the communications budget for a commer-
cial business is the shareholder value approach. This looks at communications
spending the way investors do. Additional spending makes sense if it increases the
value of the firm’s free cash flow.
This method involves forecasting how sales over time will respond to different levels
of communications expenditure. All the estimated costs, tax and investments that are
incurred at these sales levels are then deducted from revenues to arrive at predictions
of future free cash flow. The right communications budget is that which maximises
the discounted values of this free cash flow.10 The shareholder value method requires
inputting on a spreadsheet detailed forecasts about highly uncertain future events.
But any other method, such as seeking to maximise sales or the percentage of sales
approach, while simpler to estimate, produces results lacking any rational basis.
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Media selection
The next step is to select the vehicles that will carry the advertising message. Should
the company use television, radio, press, magazines, outdoor billboards or the
Internet? If it uses magazines, which magazines should be chosen and where should
the advertisements be placed inside them? The media planner will seek to answer this
problem by selecting those media that will maximise the number of exposures to the
target market for the given budget.
Implicit in this model is the assumption that product trial or repurchase is a function of
the number of people who are exposed to the advertisement (reach) together with the
number of times they are exposed to it (frequency). The idea is to choose a media sched-
ule that has high reach and high frequency. A third factor in the selection is impact.
Impact is the qualitative value of an exposure through a given medium (e.g. a corporate
advertisement may have a higher impact in The Economist than in The Grocer).
The advertising agency will look at a media schedule’s gross rating points. This is the
total number of exposures it receives. If a schedule reaches 90 per cent of households
with an average exposure frequency of 3, it achieves 270 gross rating points. It is also
likely to produce a weighted number of exposures which weights the gross weighting
points that a vehicle achieves with its relative impact score. It should be added that
exposures and frequency refer to the number of people seeing the vehicle carrying
the advertisement, rather than the advertisement itself. The number of people actu-
ally noting the advertisement in the magazine will normally be substantially less
than the reported number of exposures.
A problem for the planner is that there is a direct trade-off between reach, frequency
and impact. For example, the planner can spend the budget on increasing the
number of people likely to see the message, or increasing the frequency with which a
smaller number of target customers see it. If the planner pays a premium for a high-
impact vehicle then there is a trade-off in terms of lower frequency or exposures. The
art of scheduling is to choose the combination of cover, frequency and impact that
will be the most effective. Most experts, for example, argue for a minimum frequency
of three or four. The first exposure creates awareness and the second builds compre-
hension. It is only when a third or fourth exposure takes place, so the argument goes,
that a predisposition to action occurs. If such a target frequency is set, then the reach
is determined automatically by the budget.
Each of the different broad types of media – press, TV, radio, Internet, etc. – has char-
acteristics that influence its cover, frequency and impact. Four criteria affecting the
choice of media vehicles are as follows:
■ Target market. If the product is aimed at a narrow segment, such as architects,

broad-beam media such as television and national newspapers are very wasteful.
■ Budget. If the firm can afford only a small expenditure on advertising, costly
media such as television will be ruled out.
■ Product. If a product is bought largely on rational grounds, the advertisement is
often more effectively placed in a newspaper or magazine. The Internet is effective
if customers are likely to engage in extensive search for the best value. Television is
good for products bought on emotive grounds, where images of pleasure, status
and style can be exploited.
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■ Message. Television is outstanding both for impact and for the presentation of
emotional messages. It offers greater creative scope than other media.
Once the planner has made the broad strategic choice across the media (the inter-
media choice), specific choices have to be made within each medium (intra-media
choices). If the planner is to use newspapers, then the matter of which ones has to be
determined. Each vehicle has a cost per thousand people reached. For example, the
Daily Mirror has an estimated readership of 4 million. If a one-page spread costs
€45,000, the cost per thousand is €11.25. The Daily Telegraph cost per thousand is
about €25 and the Financial Times over €130.
The planner inclines towards the lowest cost per thousand. But these figures have to
be adjusted for audience quality. If the target audience is senior executives, few read
the Daily Mirror while most read the Financial Times. Some agencies have computer-
based media selection models that also adjust for audience-attention probability.
Readers of Country Life, for example, pay more attention to advertisements than do
readers of the Sunday Times. Another adjustment factor is editorial quality. The pres-
tige of a magazine may also affect the exposure value. Finally, placement of the
advertisement in the vehicle is an important factor. A back page in a magazine is
worth more than the right-hand page in the middle.
Once the schedule is determined, next comes the timing of the expenditure. Should
the money be spent to maintain a continuous level of advertising, or should it be
spent on short, sharp bursts? The answer depends upon the nature of the market. In
particular, it depends upon whether the product is seasonal or bought throughout
the year, whether it is a frequent or infrequent purchase, whether it is a growing or
static market, and whether people usually forget about the product because it is a
low-involvement purchase. Planners distinguish four timing patterns:
■ Continuous. A continuous schedule aims at an even spread of exposures over a

period. It is appropriate for expanding markets where new buyers can be attracted
and for frequently purchased products.
■ Concentrated. A concentrated schedule focuses the expenditure in a single period.

It is appropriate for seasonal items such as ski gear and Christmas gifts.
■ Flighting. This involves alternating advertising with gaps without support. It is used
when the budget is small and for infrequently purchased items.
■ Pulsing. This involves periods of low advertising spend reinforced with occasional
bursts of heavy spending. This is often used with strong, mature brands. Strong
brands have been found capable of maintaining market share for up to a couple of
years with little advertising, but then they need to be boosted before people begin
to forget and shift towards newer ones.
Evaluating advertising effectiveness

During the campaign and after it is completed, the results need to be evaluated. Has
it produced the results expected? Has the advertising been effective? To answer these
questions, it is necessary to have had clearly defined objectives at the start and to
have collected the appropriate information. If managers have done this well, then
they can compare the results, identify the variances and explore the reasons for the
successes and failures.
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Table 9.3 compares the results of an advertising campaign with the objectives originally
established for it. It appears that the campaign did well in creating positive attitudes to
the brand and intention to buy, but the brand failed to achieve the targeted trial rate.
This in turn led to a failure to achieve the market share objective. Anticipating vari-
ances, the company had also asked questions in its post-campaign telephone survey
about the reasons for non-trial, when the respondents had not purchased the brand.
The main reasons were found to be failure of the salesforce to achieve distribution tar-
gets – many customers were not able to try the product because it was unavailable in
the shops. This reinforces the point that advertising always depends upon other factors
in the marketing mix. Here the advertising can be judged as achieving its communica-
tions goals, but the campaign needs to be reinforced by boosting existing distribution
levels. This last objective depends on the effectiveness of the salesforce.
Direct response marketing

Direct mail, telesales and e-mails are examples of direct response marketing. These
have been growing very rapidly in the last decade in most countries. Direct response
marketing differs from advertising in three important ways. First, it usually targets
named individual customers rather than operating indirectly through a mass medium
such as newspapers or television. Second, it normally aims at an immediate response
rather than an increase in awareness or positive feeling about the brand. Finally, pur-
chases are made directly from the manufacturer rather than through an intermediary
such as a shop or a salesperson.
Direct mail (including mail order catalogues) is the largest component of direct mar-
keting. The average European received over 60 direct mail pieces in 2001, with
Switzerland top at 235 pieces per capita and Poland bottom with 9. Later estimates
for the UK indicate that in 2003 over €3.5 billion was spent sending 5.4 billion items.
Telemarketing has been growing at around 30 per cent per annum. In recent years we
have also seen growth in the use of radio and television and the Internet to generate
direct sales, whereby the customer responds by phoning in a credit card order, or
orders by mail or online.
Several factors explain the rapid growth of direct response marketing. For the cus-
tomer, it is often more convenient and time saving to buy from a catalogue or over
the phone or Internet than to go visiting suppliers or meeting their representatives.
Table 9.3
Measure Objective Result Variance (%) Source
Monitoring
advertising Market share 10 9 –10 Retail audit
effectiveness Awareness Survey
Unaided 40 45 +13
Aided 90 88 –2
Brand attitude 60 68 +13 Survey
Intent to buy 40 47 +18 Survey
Trial 30 22 –27 Consumer panel
Repurchase rate 70 75 +7 Consumer panel
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For the supplier, direct marketing is often more effective. It allows a finer targeting of
customers than relying on mass media and it is also much cheaper than direct sell-
ing, where a call by a representative may cost an average of €150. Finally, direct
response is now increasingly used in forging continuing relationships with high-
value customers. Companies such as British Airways and American Express use their
customer databases to maintain continual contact and provide a stream of tailored
offers to carefully targeted customers.
Planning direct marketing
Developing the database

To make effective use of direct marketing, a company needs a good database of those
customers that should be targeted. Many companies buy or build databases that are
insufficiently targeted. They mail to the top 10,000 companies rather than to those
prospects likely to respond to an offer. The results of such poorly targeted databases
are junk mail, low response rate and irritated customers.
In recent years, sophisticated companies have become more alert to the value of tar-
geted databases. Market research agencies have been developing new lifestyle and
geodemographic databases that allow consumer goods companies to identify more
precisely those households most likely to be in their particular target segments. The
client receives a list of addresses of customers whose consumption behaviour, age,
income and other profilers closely match its desired market. Retailers and industrial
companies, too, are now getting more skilful at developing their own databases from
records of the activities of their existing customers, and are using these to create addi-
tional sales. With the enormous power and flexibility of modern computers,
databases are certain to become more sophisticated, tailored and widely used in the
future to market goods and services.
Objectives
If investments in direct marketing are to be evaluated, then the objectives need to be
clarified. Traditionally, the objective has been to generate immediate sales. But with
the growing appreciation of the power of direct marketing, other tasks are being
assigned to it. Some companies use it to generate leads for targeting the salesforce.
More companies are now using it to build individual relationships with customers
that reinforce attitudes and loyalty to the company. Direct mail can provide informa-
tion about new services, the benefits of brand loyalty and offers that will be available
in the future.
Strategy
Direct marketing strategy focuses on maximising the response rate. Each medium
such as direct mail, telesales, the Internet and catalogue mail order has its own rules.
Response rates can be a major problem. But recent research shows that in the UK 61
per cent of mail shots are opened and read. In the USA the comparable figure is 42
per cent.
Various studies have been made to determine the factors that will enhance response
rates. Starting on the outside, characteristics of the envelope that increase attention
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and response are the use of illustration, colour and a strong reason for opening the
envelope (e.g. a free gift or contest). The sales letter or brochure should be simple,
easy to read and with a clear and interesting offer. A letter and an envelope that are
personalised rather than addressed to a firm or a department do significantly better.
Reply-paid cards and freephone telephone numbers also greatly improve response
rates. Timing also has to be considered. It is best to avoid periods when letterboxes
are crowded, such as Christmas. Similarly, Mondays are best avoided, with Tuesdays
and Wednesdays the preferred days.11
An advantage of direct response marketing techniques is that different methods and
elements can easily be tested. It is straightforward to experiment with different mail-
ing lists and offers and to compare responses. This way major users such as banks,
airlines and book clubs build up a detailed understanding of what types of direct
response work in their markets.
Evaluating direct response

While it is fairly easy to test and choose between two direct response options, it is less
straightforward to calculate the economic pay-off of a campaign. It is natural to start
with a break-even calculation. If the cost of a direct response campaign is €50,000
and the profit contribution rate on the products being sold is 50 per cent, then the
campaign needs to generate over €100,000 of incremental sales to be profitable. There
are two reasons why this type of marginal analysis tends to undervalue the campaign.
First, there are likely to be carry-over effects. Some of the customers who respond to
the campaign will also buy in subsequent periods. The campaign creates assets: cus-
tomers who generate revenue over a period longer than that measured by the
campaign. Second, while only 2 or 3 per cent may buy the item promoted in the
direct marketing campaign, the communications effects may enhance sales in future
periods. A much larger proportion than those buying the product are made aware of
it, and some will intend to buy in the future.
The precision of direct marketing, its relatively low cost and the acquisition of more
information about customers mean that it will play an increasingly central role in
marketing in the future.
Interactive marketing
The most recent and by far the fastest-growing channel for direct marketing is inter-
active marketing. Interactive marketing can be defined as providing and responding
to information by computer, phone or television. Currently, the most significant
forms of interactive media are the Internet and interactive television.
Interactive marketing looks certain to change fundamentally the way in which
organisations market and communicate in the years ahead. For the consumer, inter-
active marketing offers convenience, a source of objective and comprehensive
information about alternative products, and a relatively hassle-free shopping envi-
ronment. People can shop from their homes 24 hours a day. For companies, the
power of interactive marketing lies in its ability to generate a direct and immediate
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Sales promotion
response from consumers. Unlike advertising or other forms of direct marketing,

there is no built-in delay (such as having to write a letter, telephone a response or
visit a shop). Interactive marketing has several advantages.12
First, it requires the audience to be proactive by asking for a response to the message.
Research shows that people who respond to messages (rather than merely receiving
them) tend to retain information far longer and more accurately. Second, interactive
messages are more flexible. The recipients can search for the details they want, study
them at their own pace, and ignore information they do not want. Third, interactive
messages can be relationship building. Interactive marketing can also be very low
cost. For small firms, it can break down industry entry barriers. They do not need to
invest in stores or heavy TV advertising, and the cost of digital catalogues is a fraction
of the cost of printing and distributing mail catalogues.
There are two types of interactive medium: online and offline. Offline media are dis-
crete packets of information (e.g. a CD-ROM); online media are communications
systems that link the target and the marketer together (e.g. the Internet). Online sys-
tems have several advantages, including continuously updated information, the
ability to create a two-way dialogue, and the opportunity to develop ‘club-like’ sites
that encourage customer loyalty.
■ Internet. The growth of the Internet was the most astonishing technological phenome-
non of the last decade of the twentieth century, and its continued growth is being
driven by broadband, which provides continuous high-speed access for a fixed price.
■ Media convergence. In early 2005 there were a variety of suppliers offering a pack-
age which provides TV, radio, video recording and editing, Internet access and
telephone and even videophone from a modification of a basic home computer
system.
Businesses are increasingly exploring the potential of interactive media for marketing
purposes. Online media are now often used to promote organisations, for example by
providing searchable company annual reports. The organisation without a web-site is
now the rare exception. Newspapers and magazines use their web-sites to allow cus-
tomers to sample their products and some provide information not available in the
traditional format. Businesses can also use e-mail and the Internet to create commu-
nities and conduct market research. As with all media, interactive marketing requires
careful planning: setting clear objectives, defining the target audience, developing
effective messages and following up with careful implementation and evaluation.
Sales promotion
The amount spent by companies on sales promotion now exceeds that spent on
advertising and it is growing faster. Whereas advertising and direct response market-
ing give customers a rational or emotional argument for purchase, sales promotion
gives an economic incentive in the form of price reductions, free goods or the chance
to win prizes. Sales promotions are of three main types: consumer promotions, trade
promotions and salesforce promotions (Table 9.4). Each is geared to trigger actions
from one target group.
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Table 9.4
Consumer promotions Trade promotions Salesforce promotions
Types of sales
promotion Price reductions Dealer loaders Bonuses
Coupons Loyalty bonuses Commissions
Vouchers Sale or return Coupons
Competitions Range bonuses Free gifts
Free goods Credit Competitions
Premium offers Delayed invoicing Vouchers
Trade-in offers New product offers Free services
Stamps Competitions Points
Guarantees Trade-in offers Money equivalents
Events Free services
Displays Training
Reciprocal buying
Why have sales promotions generally taken over from advertising as the primary
method of persuasion? The first reason is the short-term pressures that managers are
under to maintain or increase performance. Generally, sales promotions produce
results quickly. Brand advertising can take months or even years for its full effects to
appear. Second, there is a feeling in some circles that advertising effectiveness is
declining, in part due to the sheer number of messages that customers receive daily.
In addition, unlike advertising, sales promotions are normally a variable rather than a
fixed cost. If the incentives do not trigger extra purchases, the costs of the promotion
are not incurred. In many mature markets, customers also know that most brands
will be satisfactory. In these cases, they become deal-prone: looking to buy brands
that offer special incentives. Finally, the increasing power of the retailer has pressured
manufacturers to offer more and more inducements to obtain distribution and trade
push. In the UK, for example, three retailers now account for over 50 per cent of the
€150 billion total grocery market, Similar concentration ratios occur in many western
European markets.
Trade promotions
Promotions undertaken by manufacturers to incentivise retailers and wholesalers
exceed the amount spent on consumer promotions. Manufacturers provide the trade
with special deals to achieve one or more of the following objectives:
■ To persuade outlets to stock the brand. Especially for new products, but increasingly
for existing brands, retailers and wholesalers use their negotiating power to
demand extra rebates, allowances, free goods and extended credit terms.
■ To persuade outlets to push the product. Manufacturers often want the outlet to
give their brands more shelf space, to participate in consumer promotions and
generally to put additional effort behind the brands. Professional trade buyers
invariably expect to be paid extra for pushing the product.
■ To compensate for price increases. Manufacturers will often give special allowances
to compensate the trade for temporary sales reductions that occur when the price
of a brand is raised.
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Sales promotion
The characteristics of trade promotion are contrasted in Table 9.5. Marketing and
brand management are generally hostile to trade promotions, seeing them as ‘wasted’
money. This fear is often a source of considerable friction with the company’s sales-
force, who have to deal with the trade. The salesforce believe that trade promotions
are essential to gain retail support and that without imaginative deals they will lose
share to competitors.
In contrast, the marketers see the growth of expenditure on trade promotion as
reflecting the naked use of buying power by dominant retail chains. They see trade
promotions sucking cash out of advertising and consumer promotions to the long-
term detriment of the brand franchise. This they see as producing a vicious circle of
weakening brands, leading to greater retail power over the distribution chain,
resulting in turn in lower manufacturer margins. It is estimated already that the
cost of trade promotions to grocery manufacturers is double what they currently
report in profits.
Second, marketing managers believe that price-based trade promotions do not create
any loyalty. Once the promotion is finished, retailers will regress back to their previ-
ous purchasing patterns. Worse, retailers often time their buying to take advantage
of manufacturers’ promotions – stocking up when a deal is on, and cutting back
when there is no deal being offered. This results in a greater than anticipated cut in
the suppliers’ margins. A short-term boost in sales is more than offset by a subse-
quent drop when the product is back at full margin. A final problem is the lack of
manufacturer control over the results of the trade promotion. Retailers often fail to
push the product in the way the manufacturer expected when the promotion deal
was agreed. Generally the manufacturer cannot monitor the retailer’s behaviour or
enforce its wishes.
But while these criticisms are often justified, marketers have to recognise the reali-
ties of today’s marketing environment. Competitive conditions have changed. The
large, modern retailing group adds value for customers and the manufacturer has to
meet the economic expectations of such businesses. The concentration of retail sales
also simplifies the manufacturers’ task – three retailers mean access to 50 per cent of
the UK grocery market. The manufacturer has to meet the needs of both the cus-
tomer and the retailer. Trade promotions will remain an essential part of the
negotiating process.
Table 9.5
Advertising Consumer promotion Trade promotion
Comparing three
promotional tools Franchise building Non-franchise building
Brand benefit emphasis Price emphasis
Higher marketer control Low marketer control
End consumer is primary target Trade is primary target
Pull strategy Push strategy
Long-term impact Short-term impact
Fixed cost Variable cost
Source: Adapted from John A. Quelch, Teaching Note for ’Chesebrough-Ponds’: Vaseline Petroleum Jelly’, Boston, MA:
Harvard Business School
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Consumer promotions
Manufacturers use consumer promotions such as samples, coupons, stamps and
price-off deals to incentivise consumers. Consumer promotions can increase sales in
one or more of the following ways:
■ Attracting customers to try a new brand. Most new brands are copies of existing
offerings or ‘new improved’ . Promotions are often used to encourage trial of
new brands.
■ Attracting extra customers to an exisiting brand. Promotions are often used to try to
increase the number of current customers. For example, a promotion might offer
extra value to encourage someone who has not purchased the brands for a consid-
erable time to try it again.
■ Inducing customers to use more of the product. This might be done by promoting
new uses of the product or encouraging customers to use it more frequently.
Again, traditional marketers are sceptical about the value of consumer promotions.
First, they point out, frequent promotions can cheapen the image of the brand.
Second, promotions normally attract frequent brand switchers who only look for low
prices or good deals. Such customers are unlikely to stick to the brand once the pro-
motion finishes. In general the evidence supports this view: promotions do bring
immediate sales gains, but unlike advertising they do not build long-term consumer
franchises. Promotions usually produce only temporary blips from the underlying
trend of sales.
However, the case against consumer promotions can be too one-sided. First, there is a
defensive argument: if all the competitors are using promotions, it is difficult to
stand aside without losing market share. Second, consumer promotions can be an
important tool for a market challenger seeking to shake habitual buying patterns in
low-involvement markets. Free samples and special offers can force buyers to break
from their routine buying patterns, giving the challenger the chance to demonstrate
the advantage of its brand.
Promotional planning
As with all elements of the marketing mix, sales promotions have to be carefully
planned and co-ordinated. The manufacturer has to be clear about the objectives. Is
the aim to obtain trial or enhance loyalty? The size of the incentive has to be
decided. Some promotions cost much more than others. For example, a consumer
promotion offering 20 per cent off the regular retail price can easily involve selling
the product at a net loss. On the other hand, a ‘self-liquidating offer’, where the cus-
tomer sends money and a coupon for a promotional item, can cost the manufacturer
nothing at all. Other decisions concern the duration of the promotion, its timing and
implementation. Again, it is a good idea to pre-test the sales promotions to assess
their effectiveness.
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Public relations
Public relations
Public relations can be defined as those activities that the organisation undertakes to
communicate to its publics that are not paid for directly. Most medium-sized and
larger organisations will have a public relations department in their head office. The
biggest companies also typically retain a specialist independent public relations firm
to handle the most difficult and important assignments.
The publics that the firm may seek to communicate to can include customers, the
trade, shareholders, government bodies, local communities and employees. The
major activities undertaken in public relations are as follows:
■ Achieving positive coverage in the media. A major task is proactively getting news-
papers, journals and television to carry positive and persuasive stories about the
company, its people or its products.
■ Creating and reinforcing the corporate image. The company’s publications, includ-
ing annual reports, brochures, stationery, business forms and uniforms, should be
designed to communicate a visual identity that the public immediately recognises
and feels good about.
■ Sponsoring special events. Organisations can draw attention to their products and
activities by presenting events that attract target publics. These include news con-
ferences for journalists, exhibitions, competitions and the sponsorship of sports
events such as Barclay’s sponsorship of the UK Premier Football League or activities
in the arts such as the long-standing Booker Prize for literature (see Box 9.1).
Box 9.1 The Booker Prize

Booker Brothers & Co. was founded in 1834 to trade in rum and sugar. In 1900, it merged with John
McConnell & Co. and, in the 1920s, the company was the largest property owner in British Guyana. In
1968, it became Booker McConnell, and at that point it was a vast, diversified international business. It
had a profitable publishing operation and published such luminaries as Agatha Christie, Dennis Wheatley,
Georgette Heyer, and Harold Pinter. Also in 1968, Tom Maschler, a publisher at the firm of Jonathan Cape,
approached Booker’s management with the idea the company should put up a small percentage of its
publishing profits to create a literary prize modelled on the French Prix Goncourt. The company liked the
idea and agreed to fund a prize to be given annually for the best full-length novel in the British
Commonwealth of Nations. The first Booker Prize went to Something To Answer For by P. H. Newby in 1969.
Booker McConnell continued to evolve independently of the prize. In 2000, it merged with Iceland to form
Big Food Group which in turn was acquired by Baugur the leading Finnish retailer in 2005.
In 2002 the Booker Prize Foundation, a registered charity, took over from the Big Food Group responsibility
for the organisation and operation of the prize and for the securing of a new commercial sponsor and they
announced that the Man Group had secured the coveted sponsorship for an initial period of five years,
during which time the prize would be known as The Man Booker Prize for Fiction.
Man Group plc is a leading global provider of alternative investment products and solutions as well as one
of the world’s largest futures brokers. The Group employs over 2,800 people in 15 countries and is listed
on the London Stock Exchange (EMG.L) and is a constituent of the FTSE 100 Index.
▼
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Booker judges are selected from England’s leading critics, writers, and academics. The prize amounts to
£21,000, but these days the prize money is dwarfed by the worldwide sales increase the prize causes for
the winner. The last four winners were 2001: Peter Carey True History of the Kelly Gang, 2002: Yann Martel
Life of Pi, 2003: DBC Pierre (Peter Warren Finlay) Vernon God Little, 2004: Alan Hollinghurst The Line
of Beauty.
Man Group have the sponsorship but the prize is still generally referred to as the “Booker Prize” and the
company has much work to do to transfer the PR value to its own name.
Source: At The Margin (Whole Issue #28), 12 March, 2002 access: http://www.thirdlion.com/ATM28.html
■ Lobbying politicians and officials. Major organisations seek to inform and influence
those responsible for framing legislation that may affect the success of the com-
pany and its products. Companies and their trade associations make sure that key
people are fully informed about the advantages of their products or activities, and
are aware of the implications of unfavourable legislation.
■ Advising management about key public issues. Operating managers are often not suffi-
ciently sensitive to the opportunities presented by effective PR. The PR office needs
to encourage managers to publicise their most valuable activities. They also need to
be made aware of the consequences of negative public reaction to their work.
While much PR is aimed at the City and the government, it should be seen as poten-
tially a highly effective marketing tool. Companies and organisations such as Marks
& Spencer, Virgin and Live Aid have used PR as a cheaper and more effective option
than advertising. PR can contribute to the following marketing tasks:
■ Creating product awareness and interest. New stories fed to the press and television
are highly effective in communicating the firm’s activities.
■ Launching new products. The media are always looking for new stories that might
be of interest to their audience.
■ Influencing specific target market segments. PR can be highly effective for demon-
strating the value of the firm to the local community or to minority groups, for
example, as a source of employment or prestige.
■ Coping with crises. Well-planned PR can be crucial for dealing with the occasional
potential disasters that occur. Perrier used PR to reassure customers after the product
had to be withdrawn on a world scale in 1991 following a contamination scare.
Coca-Cola fared less well in managing the Dasani launch and withdrawal in 2004.
■ Enhancing corporate image. Anita Roddick created a unique international image for
her Body Shop chain through her speeches, autobiography and interviews with
the media.
The main advantage of PR is its effectiveness as a communications vehicle. Positive

stories about the company or products that appear in the media are seen as inde-
pendent and consequently a more reliable source than advertisements. If it is a
prestigious medium such as the Financial Times or the BBC, additional credibility is
attached to the information. Achieving the same type of impact through advertising
would be enormously expensive, if indeed it were possible at all. Yet PR achieves this
exposure for a minimal investment.
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Determining the communications mix
Developing a PR strategy is analogous to other communications vehicles. First, man-

agement has to decide what the PR objectives are. Second, the target market has to be
clear. Is it trying to communicate to shareholders or customers for example? Third,
what is the message that the company is trying to put over? For example, is it trying
to position itself as a caring, environmentally friendly company, or one at the front
end of a dynamic technology? Fourth, what are the best media to seek to utilise? It is
easy to get information into the local press, but is this worthwhile? Will leading
decision-makers read the Wigan Weekly News? In contrast, a report in the Financial
Times can have an enormous impact on top management in the City. Fifth, how is
the programme going to be implemented? Who is going to get the stories placed and
the events organised? How and when will it be done? Finally, the activities of the
PR department and the investment in agencies and events have to be evaluated.
There are three ways to evaluate the effects of PR. The easiest and the crudest is to
count the amount of coverage achieved in the media. How many stories appeared in
the media, and how many column inches were achieved? Such a count is better than
nothing. The problems are that it does not allow for the varying quality of the media
and the value of the message communicated. A second approach is to research the
communications effects. What were the changes in awareness or attitudes that
occurred as a result of the campaign? How many of these changes can reasonably be
attributed to the PR? Finally, sales and profits are the most useful indices of effective-
ness. But, as with advertising, it is very difficult to disentangle the effects of PR from
the variety of other factors affecting business performance.
Companies that are really effective at PR know that it is a long-term process. To get the
ear of the top journalists and political influencers, a relationship has to be developed
based on mutual interest. The company’s PR representatives should be known as credi-
ble and attractive sources of information. Such a relationship takes time to be built.
Without this investment, press releases or invitations to media events tend to fall on
deaf ears. Also the media, as a whole, prefer to talk to operating managers rather than
PR agencies. In general, they want to talk to the people responsible for the news, not
just those people paid to convey it. Consequently, it is a good investment to train
executives in the techniques of handling media briefings and interviews.
The manager has to allocate the budget among direct selling, advertising, direct mar-
keting, sales promotion and PR; and will want to pursue an integrated
communications strategy. What factors should determine the mix? In principle, the
answer is to switch expenditure between the categories to equalise the marginal
returns on the investments. In practice, measuring such marginal returns is a pretty
impossible task, so commonsense rules-of-thumb have to be applied.
The promotional mix varies even between firms in the same industry. Unilever, for
example, has recently focused on core brand advertising; Procter & Gamble more on
permanent low pricing. The mix has changed over time, with movements in the
costs and effectiveness of different media. In many industries the size of salesforces
has declined due to their relative cost, whereas promotion and PR have increased. But
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these alternative vehicles are normally complements rather than substitutes. Today,
companies operate in complex environments. They have to appeal to more than one
target market (e.g. both customers and the trade), with multiple messages and multi-
ple media. Each of the communications elements has a different but complementary
role to play (see Box 9.2).
Box 9.2 Howard and the Halifax

Howard Brown was propelled to the status of a national celebrity when he was selected to star in a TV
commercial for his employer HBOS. One minute, he was counting banknotes in the Sheldon branch of
Halifax Bank, an HBOS brand, the next he was signing autographs on promotional tours as the face of the
Halifax brand.
The introduction and execution is described by Robert Campbell, Executive creative director, McCann-Erickson:
‘I love the Halifax ads. They cheer me up every time I see one on television. They cheer me up because I love that
little guy Howard Brown. He is one of the best, most inspired and most unexpected advertising decisions I have seen
in a long time. I take my hat off to the people who had the guts to go with him. Who would have thought three years
ago when Howard first stumbled his way through a Halifax advert that he had such potential?
Then he was a little guy with bottle-bottomed glasses. He could sing, but he sang like a bloke in church, not like a
megastar. He was verging on the total nerd. He wasn’t your standard building society spokesman. And of course, back
then Howard was real. A real employee from a real Halifax branch, not the animated character we see today.
But between them, the clients and ad agency saw Howard’s potential. They picked Howard up, animated him,
celebrated his nerdiness, poured squillions of advertising pounds into him, and turned him into what he is now. Bigger
than Will Young and probably nearly as big as Britney Spears. Howard is a huge chunk of intellectual property value on
Halifax’s balance sheet.
It all looks so perfect now. But back then, many would have said that to do this was madness. The decision to make
Howard a megastar was an inspired and brave thing to do. Howard restores my faith in the random, talented,
courageous, lucky, magical world of great advertising.
But the thing I love best about Howard is allowing myself to wonder, where is the real Howard now? Is Howard still
working behind a counter in a branch of the Halifax somewhere in the Midlands?
Did he make a fortune, and does he now sit in a Jacuzzi in Miami, like some rap star, surrounded by squirming babes
in thongs? Was the fame too much for Howard, and is he now a monk somewhere in the Himalayas? Or did Abbey
offer him a six-figure sum and a shed load of options to go and work for them? I think we should be told.’
His answer comes from Suzy Bashford writing in Marketing Magazine in November 2001:
‘Top marketers’ jobs at Halifax are under threat from a fresh talent who goes by the name of Howard Brown, but is
better known as the smiley, speccy, black sex bomb who features in the high street bank’s TV ads.
Following the catchy ads created by Delaney Lund Knox Warren in which Brown sings an adapted version of the Tom
Jones hit Sex Bomb, Brown has been given a job in the marketing department.
It’s a new role which involves touring the country visiting Halifax branches satisfying the overwhelming demand from
little old ladies waving their autograph books, for guest appearances.
Local papers have had a field day writing stories about Halifax branches covered in Howard pin-ups, fans nicking life-
size cut-outs of Brown and women giving Brown a pair of their knickers as a little “extra”.
Brown’s celebrity stretches beyond the door of the high street bank – he has been interviewed for NOW!, and has
appeared on ITV chat show Trisha to surprise a smitten fan. Brown is an inspiration to Halifax branch advisers
everywhere – many are keen to follow in his footsteps. Testimony to this is the number of hopefuls – up to from 1100
for the current ads to 1900 for the next round – auditioning in Pop Idol-style for a chance to become an ad star.’
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A more critical evaluation of the campaign comes from Jane Bainbridge, Deputy editor Marketing in
December 2003:
‘The Howard Brown campaign personalised the cold world of financial services, while highlighting the company’s
unique positioning and attracted half a million new current account holders, but it is in danger of overselling their
offering, meaning the customer reality falls short of the advertising image. And as a pre-Howard Halifax customer, I
have seen how poorly the company has managed its influx of customers. I have witnessed a member of staff walk
down the queue in a branch, asking each person why they are waiting, trying to persuade them they shouldn’t be. You
can imagine the general disquiet among the assembled customers as they muttered about how the queue would
move much quicker if said member of staff opened an Xtra till instead.
Customers using telephone banking or automated deposits may best serve Halifax’s business model, but where
finances are concerned, many customers still want the peace of mind of dealing with a person face to face.
Halifax are to be commended for their memorable and effective advertising; now they must ensure the images
conveyed to viewers in the comfort of their homes live up to the reality of the in-store transaction.’
Howard fronted the seventh largest UK direct mail campaign in 2004 with Halifax sending out 34,360,032
pieces at a cost of £20,616,018.
He was also part of the online communications programme managed by the advertising agency DLKW:
The brief
Build a database of ‘engaged’ Halifax customers who will be positively predisposed to cross-selling.
Accepted cost of acquiring a profile and receiving permission to contact for marketing purposes is £6/person.
The idea
Offer consumers free ring tones in return for personal data and permission to re-contact.
Use songs featured in the successful Howard Brown TV campaigns: Sex Bomb, Who Let The Dogs Out, Something
Stupid, etc.
Limit promotion of offer to Halifax.co.uk.
The results
Over 44,000 customers registered for ring tones – with 70% giving permission to contact.
Cost per contact generated: £0.03.
Follow up loan campaign delivered an acquisition cost of £8/customer vs. the standard £42/customer.
Howard was voted the fifth most irritating advertisement seen on TV in 2004 but he is an excellent example
of integrated marketing communications.
Sources: Marketing Magazine and http://www.dlkwdialogue.com/ourwork/
The weight that any vehicle receives depends upon a number of factors, including
the following:
■ The company’s objectives and resources. If the company’s objective is to increase

awareness in the mass market, then advertising is the obvious medium. On the
other hand, if it wants an immediate boost to sales, promotion is relatively attrac-
tive. Resources available also influence the choice. Television is very expensive; PR
can be quite cheap.
■ Characteristics of the target market. If the target market consists of hundreds of cus-
tomers, direct selling will be an attractive vehicle. If the market consists of
millions, then mass media will be more efficient.
■ Type of product and market. In general, personal selling is the most effective vehicle
for products that are expensive, complex and high risk, and for markets with few,
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large buyers. For products that are cheaper and routine and where emotions play
an important role in the choice process, and for large markets, advertising and
sales promotion are more important.
■ Push versus pull strategy. A major factor affecting the choice is whether the manu-
facturer is pursuing a push or a pull strategy (Figure 9.11). A pull strategy focuses
promotional activities (mainly advertising and consumer promotion) at the end
customers with the aim of getting them to induce the retailer or other intermedi-
ary to stock the product. Advertising and promotion encourage customers to pull
the product through the distribution chain by creating the demand. A push strat-
egy directs promotion (mainly salesforce and trade promotions) at retailers and the
trade with the aim of incentivising them to carry the product and in turn promote
it to consumers.
■ Stage of market evolution. At the early stage of the market, advertising and public
relations are usually the most appropriate tools to build awareness of the new
product. In the mature phase, sales promotion and personal selling become rela-
tively more important. In the decline stage, advertising, PR and direct selling are
cut back as there is little to say about the product. Then sales promotion becomes
more important for stimulating the trade and customers.
Push marketing
Customer Trade intermediary Manufacturer
Promotion
Pull marketing
Customer Trade intermediary Manufacturer
Figure 9.11 Promotion

Push versus pull
marketing
Summary
The choices that buyers make are a function of three stimuli. First, their broad social
environment – their culture, personalities and social and economic situation – has the
most important influence on what they buy. Second are the offers made by competing
organisations: the relative quality of the products, the prices charged, the services that
augment the offers, and the style and efficiency of their distribution support. Third are the
messages that the organisation transmits to its target markets.
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Questions
The role of this communication is to inform the market about the company’s offer, to
persuade customers about its advantages and to reinforce the decisions of existing
customers. Lastly, in certain situations, the communications can be the point of
difference between the offers. How effective communications are depends upon how well
they conform to the social milieux of customers and how well they are supported by an
attractive marketing mix.
There is a large and growing number of communications vehicles that organisations can
employ. The primary instruments – advertising, direct response, sales promotion, public
relations and direct selling – are not competitive but complementary. Each has different
strengths, can be oriented to different audiences and presents different messages. With
the changes in the market environment, the importance of these vehicles has changed.
For example, trade promotions have become much more important, mass media
advertising less so. With the dramatic evolution of technology and media, further
significant changes can be expected in the communications mix.
Planning is essential for the communications mix as a whole and for each of the major
components. Planning means setting clear objectives, defining the target audiences,
developing effective messages and following through by careful implementation
and evaluation.
Questions
1 If you have a good product, why do you need to spend money on advertising and
promotion?
2 Why is it difficult to predict the effects of advertising on sales and profits?
3 Referring to Figure 9.6, find advertisements in newspapers and magazines that match
each of the six types of buying decision described there.
4 A university is proposing to set up a major fundraising campaign to raise €50 million.
Outline a communications plan to achieve this objective.
5 A book club is proposing a direct mail campaign to recruit members. The price of
membership is €40 a year, which entitles the member to five free books. The club
estimates that a membership generates an annual contribution of 25 per cent. The cost of
direct mail is estimated to be €100,000. What would you set as objectives for the
campaign? What response would you regard as sufficient to evaluate it as a success?
6 What PR does your organisation undertake? What are its objectives? How effectively is it
planned and evaluated?
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Notes
1. For many examples of how advertising agencies develop such images, see the annual
papers and supporting material published by WARC for the Institute of Practitioners in
Advertising’s Annual Effectiveness Awards: for example, Tim Broadbent (ed.), Advertising
Works 13 (London: WARC, 2005).
2. Tim Broadbent, ‘Evaluating advertising’, in L. Butterfield (ed.) Excellence in Advertising
(Oxford: Butterworth-Heinemann, 1999), pp. 215–30.
3. For example see Rajeev Batra, David A. Aaker and John G. Myers, Advertising Management,
5th edn (Englewood Cliffs, NJ: Prentice Hall, 1995).
4. A comprehensive presentation of buyer behaviour is Leon Schiffman and Leslie L. Kanuk,
Consumer Behaviour (Englewood Cliffs, NJ: Prentice Hall, 1997).
5. This section draws on an excellent advertising text: Judith Corstjens, Strategic Advertising:
A practitioner’s handbook (Oxford: Heinemann, 1990), pp. 57–107.
6. For further details of this view of advertishing see A. S. C. Ehrenberg, ‘Repetitive advertising
and the consumer’, Journal of Advertising Research, April 1974, pp. 23–34, and
‘Differentiation or salience?’, Journal of Advertising Research, November 1997, pp. 7–14, and
N. R. Barnard and A. S. C. Ehrenberg, ‘Advertising: strongly persuade or nudging?’, Journal
of Advertising Research, January–February 1997, pp. 21–8.
7. For an interesting review of this topic, see Fleming Hansen, ‘Towards an alternative theory
of the advertising communication process’, International Journal of Research in Marketing,
January 1984, pp. 69–80.
8. Dieter Steinbrecher, ‘The ten commandments of good advertising’ (Basle, Switzerland:
Novartis Marketing Development), mimeo.
9. For comprehensive accounts of these techniques, see Gary L. Lilien, Philip Kotler and K. S.
Moorthy, Marketing Models (Englewood Cliffs, NJ: Prentice Hall, 1992); Philippe Naert and
Peter Leeflang, Building Implementable Marketing Models, 2nd edn (Leiden: Martinus Nijhoff,
2000).
10. For an example, see Peter Doyle, Value-based Marketing: Marketing strategies for corporate
growth and shareholder values (Chichester: Wiley, 2000).
11. Louis K. Geller, Response: The complete guide to direct marketing (New York: Free Press, 1996);
John Wilmshurst, Below-the-Line Promotion (London: Butterworth-Heinemann, 1993).
12. Ward Hanson, Principle of Internet Marketing (Cincinnati, OH: South Western Publishing,
2000); John Hagel and Arthur G. Armstrong, Netgain: Expanding markets through virtual
communities (Boston, MA: Harvard Business School Press, 1997).
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‘Everybody lives by selling something.’

Robert Louis Stevenson
Chapter 10 MANAGING PERSONAL SELLING
Personal selling is the marketing function dealing with customers on a direct or face-to-
face basis. It is similar to advertising, promotion and other forms of publicity, in that it
serves as a communication bridge between the organisation and the target audience.
However, personal selling is particularly effective because it permits a direct two-way
communication between buyer and seller. This gives the organisation a much greater
opportunity to investigate the needs of the buyer and a greater flexibility in adjusting its
offer and presentation to meet these needs.
While personal selling is highly effective, employing sales people is expensive. The aver-
age cost of maintaining (including relevant overheads) a salesperson in the field was
€90,000 in the UK in 2004. In the USA, the average cost of a direct sales representative
was estimated at €350 per hour.1 Direct selling is the largest element of the communi-
cations mix. All the figures underestimate the resources going into face-to-face selling. In
the modern organisation, many managers in technical, marketing and general manage-
ment functions spend a high proportion of their time selling. The top salesperson is the
chief executive, who should be allocating a high proportion of time to maintaining key
customer relationships.
This chapter explores the management of sales. It begins with an analysis of sales objec-
tives and strategy. It then reviews how to determine the size and organisation of the
salesforce, and how to recruit, motivate and evaluate performance.
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Chapter 10 Managing personal selling
The review focuses on the changing role of the salesforce today. Three forces are shifting
the nature of selling and sales management. First, many companies have been steadily
reducing the size of their full-time salesforces. One reason is the increasing concentra-
tion of buyers. For example, there are now only two manufacturers of large passenger
aircraft in the world. Major food manufacturers are predicting that within a few years
there will be only ten major multiple grocery outlets controlling most of the retail super-
markets in Europe. The second reason is the sheer expense of employing full-time sales
people. Huge salesforces now remain in only a couple of industries where the profit mar-
gins are exceptionally high (e.g. ethical pharmaceuticals). Finally, more companies are
contracting out selling to specialist sales companies. This allows them to reduce fixed
costs and to access specialist skills and industry knowledge.
A second change is the move towards relationship management. Traditionally, selling has
been about identifying prospects, making persuasive presentations and closing the deal.
It has been transaction oriented. Today, however, both buyers and sellers are increasingly
wanting to build long-term relationships and to move away from the series of one-off
sales transactions. For buyers the move towards total quality management (TQM) leads
to a desire to reduce the number of suppliers and to build a team-like relationship with
specific companies that become fully involved in development and operations. For the
seller, creating a long-term relationship offers the opportunity to bind in the buyer, to
erect barriers to competitive entry, and to reduce the pressure on prices and margins.
A third shift is in the salesperson’s skill requirement. In the past, their dominant task was
to deliver volume. But today companies find that such a volume focus can erode profit-
ability and detract from the development of long-term relationships. Sales people now
need broader marketing and business skills to understand customer needs and build
long-term value-added partnerships with the client. This has important implications for
the selection, training, motivation and compensation of salespeople.
Salesforce objectives
The major issues in salesforce management are shown in Figure 10.1. Planning starts
with determining objectives – what do managers want the sales people to achieve?
There is no single answer to this question, since there are many different types of
salesperson depending upon the industry and the strategy of the company.
Montcrief, after analysing the jobs of nearly 1,400 sales people in 51 organisations,
devised a five-category classification of salespeople.2 In order of increasing creativity
these were as follows:
■ Order takers. Those whose primary responsibility is responding to customer orders,
resupplying them and handling their problems (e.g. shop assistants).
■ Customer servicers. Those whose main tasks are increasing business from present
customers by providing them with personal assistance (e.g. stocking shelves and
maintaining inventory).
■ Missionaries. Those whose primary tasks are increasing business by providing cus-
tomers with new information and advice (e.g. medical representatives).
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Salesforce objectives
Salesforce Salesforce Salesforce size

objectives strategy and structure
Figure 10.1
Managing the
salesforce
■ New business salespeople. Those whose primary responsibilities are winning new
business by identifying prospects, preparing bids and assessing the creditworthi-
ness of clients.
■ Organisational sellers. Those whose main responsibilities are building up and main-
taining relationships with major customers. This is the most complex and creative
form of selling.
There are seven potential tasks a salesperson has to be trained to undertake:
■ Find new customers. Salespeople have to find and gain new business.
■ Provide information. Salespeople need to communicate information about what the
company can provide to customers.
■ Sell and negotiate. They need to know how to identify prospects, make persuasive
presentations, handle objections, close deals and follow up on sales.
■ Service. Salespeople are responsible for seeing that customers are properly serviced
in terms of delivery, financial support, technical assistance and problem solving.
■ Market research. Salespeople are important sources of information about changing
customer requirements and competitive activities.
■ Management. The professional salesperson is responsible for managing and allocat-
ing time efficiently between customers and products, and drawing on the
resources and personnel of the company to achieve the sales objectives.
■ Maintain relationships. Salespeople should aim to bind in the client by demonstrat-
ing how the company can add long-term value to the customer’s business.
The job of sales management is to determine what priority and time should be given to
each of these various tasks. Managers then have to devise strategies and sales organisa-
tions that are capable of achieving these objectives. They are also responsible for
recruiting and training salespeople able to undertake these tasks and for devising com-
pensation, motivation and control procedures to follow through on their achievement.
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Salesforce strategy
The ultimate objective of sales management is to contribute to achieving the com-

pany’s objectives of growth and profitability through meeting the needs of customers.
Today’s top managers see this as best accomplished by creating a strategic partnership
with the client. Where such partnerships are created, the business escapes from the
continual series of competitive bids against other suppliers that erode margins and
increase uncertainty. Creating a stable partnership has other advantages for the sup-
plier. Customers are a major source of ideas. Von Hippel, for example, studying
industrial innovations, found that 67 per cent of ‘minor improvements’, 85 per cent of
‘major improvements’ and nearly all significant innovations were generated by ideas
from customers.3 The pattern is similar in consumer goods, where the major retailers
increasingly provide the innovative ideas for manufacturers. Clearly, suppliers that
work closest with the customer are most likely to be the recipients of these benefits.
To see the opportunities for strategic partnerships, the supplier has to understand the
viewpoint of the customer. A good example of a modern purchasing operation is that
of the global chip manufacturer Intel. Intel has sales of over $30 billion and 10,000
suppliers worldwide, of which the best are designated ‘most favoured supplier’ (see
Box 10.1).
Box 10.1 Intel’s preferred suppliers

Each year Intel presents awards to those suppliers demonstrating superior performance. In 2005 it
announced that 26 companies would receive Intel’s Preferred Quality Supplier (PQS) award for outstanding
commitment to quality and performance excellence. These suppliers provided products and services
deemed essential to Intel’s business success in 2004. They excelled at meeting and exceeding high
expectations and tough performance goals to distinguish themselves from the thousands of suppliers that
worked with Intel.
The 2004 award winners were: Advantest Corporation; Amkor Technology Inc.; Applied Materials; Asyst-
Shinko Inc.; AZ Electronic Materials; Compugraphics USA Inc.; Credence Systems Corporation; Daewon
Semiconductor Packaging Industrial Company; Dow Corning Corporation; Elec & Eltek International
Holdings, Ltd.; Georg Fischer Piping Systems, Ltd.; Henkel Corporation; Hitachi High Technologies; Hon Hai
Precision Industry Co., Ltd.; IBM Corporation; ICOS Vision Systems; Kelly Services Inc.; KES Systems &
Service (1993) PTE Ltd.; Komatsu Electronic Metals Co., Ltd.; Moses Lake Industries (Tama Chemicals);
Munters Corporation; Nan Ya Printed Circuit Board Corporation; NEC Electronics Corporation; Nikko
Materials Co., Ltd.; Siliconware Precision Industries Co., Ltd.; Tyco International, Ltd.
The company commented on the awards as follows:
‘Dedication to quality and continuous improvement are highly valued by Intel,’ said Gidu Shroff, Intel vice president
and director of Materials. ‘The recipients of this year’s PQS awards have demonstrated commitment through top-
notch performance in their respective industries; they have delivered world-class products and services while providing
outstanding attention to affordability, innovation and excellence. We are proud to be associated with the recipients of
this award.
‘Our Preferred Quality Supplier award winners this year stand out for their exceptional commitment, contribution and
consistent performance to Intel’s technology, quality, cost, availability and customer satisfaction requirements,’ said
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Salesforce strategy
Jai K Hakhu, Intel vice president and general manager of Technology Manufacturing Engineering. ‘These distinguished
suppliers are role models for our industry and are well positioned to meet future technical and competitive
challenges.’
The PQS awards are part of Intel’s Supplier Continuous Quality Improvement process that encourages
suppliers to strive for excellence and continuous improvement. To qualify for PQS status, suppliers must
score at least an 80 per cent rating in such areas as performance and ability to meet cost, quality,
availability, delivery, technology and responsiveness goals.
See: http://supplier.intel.com/quality/
Another approach is typified by Siemens, the German industrial giant which classifies
all suppliers on two criteria: degree of differentiation and impact on profitability.
Differentiation is measured by the technical complexity of the product or service and
the difficulty Siemens would have in finding a replacement supplier. In marketing
technology, this is the degree to which a supplier has a sustainable differential advan-
tage. The profitability impact is measured by the relative amount the Siemens
business unit spends with the supplier. The larger the amount spent, the greater is the
value of negotiating a 1 per cent price cut. This leads to a purchasing matrix that clas-
sifies supplier relationships into four types (Figure 10.2):
■ Strategic partnership. This is the ideal position for a supplier. Here the customer
desires an intense, long-term co-operative relationship and a joint effort to build
the business. Outside suppliers are effectively excluded from competing.
■ Preferred supplier. Here the customer again wants a long-term relationship with
the supplier. While the amount spent is not great, the product or service is critical
to the buyer. Specialist tools or software are examples.
■ Regular supplier. These are small-volume, routine purchases. Generally a customer
will want to reduce the number of suppliers, and streamline and simplify the
ordering process. Price will be important to customers, but because they are small
items, they will not be prioritised by buyers.
Supplier’s differential advantage
High Preferred Strategic

supplier partnership
Regular Commodity
Low
supplier supplier
Low High
Figure 10.2
The purchasing Profitability impact
relationship matrix
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■ Commodity suppliers. Suppliers of these high-volume standard products are the

most vulnerable. A small price cut would have a big impact on the customer’s prof-
itability. Purchasing staff will have a major incentive to push down prices and
encourage alternative suppliers.
Note that a supplier may be in different positions with different customers. For exam-
ple, a printing ink manufacturer was a ‘commodity supplier’ to customers in the
packaging industry and a ‘regular supplier’ to companies producing compact discs.
The same product sold at €7 per kilo to the packaging industry, where the ink was a
significant cost and where margins were tight. For customers producing compact
discs, where the ink was a small cost component and where gross margins were high,
the supplier was able to charge €40 per kilo.
What are the implications of the purchasing relationship matrix to the supplier?
Clearly the task of the sales team is to strengthen its position, where possible, on
these two dimensions, thus making itself more important to the customer.
Profit impact dimension

A supplier’s position on the profitability impact factor can be increased by seeking to
meet more of the needs of the customer. This may mean broadening its product
range or forging alliances with companies producing complementary products or
services. It should be noted, however, that this strategy can be dangerous if a com-
pany is not able to create a differential advantage. A major commodity supplier is a
tempting target for an aggressive purchasing staff.
Differential advantage dimension

Seeking to create a differential advantage is always a good strategy. Today, however, it
is becoming increasingly challenging to do this. This is illustrated by the concept of
the value ladder in Figure 10.3. The first step on the value ladder is to offer a product
that meets the customer’s specifications. The problem today is that many companies
can do this or, if it is an innovation, they can soon copy it. With this type of product
focus, competition is fierce, price sensitivity is high and it is easy for the customer to
switch to alternative suppliers. A supplier has therefore to seek to move up the value
ladder. Normally this means adding superior quality and then higher-quality service
and support. Again, however, today’s competitors are fast to follow these product and
service enhancements. A company can establish a differential advantage with good
products and good services, but it is hard to maintain it.
To maintain a differential advantage, the seller has to make a quantum leap to the
fifth and sixth steps on the value ladder, which establish a strategic partnership with
the client. The fifth level is reached when the supplier is regarded as someone who
can contribute to the client’s business by helping it identify new market opportuni-
ties, to lower its costs or to improve its productivity. The final step is where the
supplier becomes a partner that the client can call on for advice and consultancy on
its broad organisational problems, such as its strategic direction, organisational cul-
ture, structure or systems.
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Salesforce strategy
Switching costs
Contribute to client’s organisation

Differentiation
Contribute to client’s business
Quality products with excellent service
Quality products with service
High-quality products
Product Products that meet specifications

focus
Figure 10.3 Price
Selling and the sensitivity
value ladder
For example, the design company Wolf Olins is usually initially approached by
clients (such as Akzo Nobel, Credit Suisse and Renault) wanting an update of their
corporate logo and visual identity. But Olins’ salespeople avoid offering such simple
‘products’, which are usually easily emulated by competitors. Instead they persuade
clients to employ them to do a comprehensive review of how the company commu-
nicates to its publics. Subsequently, they advise the company on its corporate
mission, organisational structure, marketing and employee relations, as well as its
visual communications. By moving up the value ladder, Olins makes a quantum leap
in its potential contribution to the effectiveness of the client’s business and organisa-
tion. This differentiates it from competition and shifts the relationship away from
comparisons of price and product features.
There is a fundamental distinction between the bottom four rungs of the ladder and
the top two. To be good at the former, the salesperson or account executive has to be
expert in their business – and needs to have a first-class product and service to sell.
The salesperson’s company needs to be expert in producing and supporting top-
quality products. But with the top rungs the supplier needs to be expert in the busi-
ness. The company needs to understand the client’s business and its value chain. The
supplier is a consultant rather than a salesperson. Clearly the skill requirements for
this type of consultancy are quite different from normal product and sales training.
In general, selling strategy should be about shifting from a focus on closing transac-
tions involving price and product comparisons to one of bonding a relationship
based upon mutual advantage. Box 10.2 suggests some ways of creating such bonding
relationships. Achieving these partnerships depends upon customers perceiving the
supplier’s salespeople as experts in the customer’s business and the technologies rele-
vant to it. They will listen to salespeople who have expert knowledge about the
marketing, organisational and technological problems they face. If the customer per-
ceives that it has more expertise than the supplier, the customer will set the product
and service specifications and transform buying into a transaction based upon the
lowest price.
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Box 10.2 Bonding and the buy–sell relationship

Joint venture projects Creating entry barriers
■ assigning staff to the customer ■ electronic links
■ creating joint project teams ■ joint innovation teams
■ involving the customer in joint business ventures ■ superior products and applications
■ pooling research and development facilities ■ network of relationships
■ working with the customer in market research ■ joint long-term planning
■ a shared customer database ■ pricing based on overall business
Building exit barriers Developing trust

■ making the customer dependent on technical ■ high frequency of contact
support ■ giving warning of future problems
■ loaning equipment ■ open communication
■ signing long-term contracts ■ involving top management
■ giving financial support ■ ensuring promises are kept
■ creating inter-company trading ■ social activities and entertainment
■ incorporating unique component design and ■ sharing of mutual problems
tooling
■ moving into shared premises
Source: Adapted from Ken Burnett, Strategic Customer Alliances (London: Pitman, 1992), pp. 54–5
Structure and size
Determining the structure of the salesforce

The objectives and strategy of the business will influence the structure and size of the
salesforce. If the company is selling a single product line to one end-user industry
with customers spread throughout the country, a geographically structured salesforce
may be appropriate. If it is selling many products to different types of end-user mar-
kets, a product or market salesforce structure may be better. If it depends upon a
handful of major buyers, an account management structure is likely to be superior.
Geographically structured salesforce

The simplest structure is to assign each salesperson an exclusive territory where they
sell the company’s entire product line. This has three advantages. First, the sales rep-
resentative has clear responsibility and accountability. Second, the salesperson’s
performance can be judged by comparing the results with those of other salespeople
in other territories. Third, travelling costs are minimised as the salesperson has a rela-
tively small geographical area.
In designing territories, management will normally want to make them of equal size
so that equity exists among salespeople. Unfortunately, there is generally a conflict
between equalising size in terms of workload and equalising it in terms of sales
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Structure and size
potential. Generally, some areas of the country have little potential while others,
where industry or population are concentrated, have enormous opportunities.
If the territories are structured to equalise workload, salespeople in sparsely populated
areas will have fewer opportunities than those in the better areas. If salespeople are
paid a commission, such a structure would be particularly unfair. If, on the other hand,
the territories are structured to equalise potential, then the problem becomes that
salespeople in territories where many customers are concentrated in a small area can
achieve sales much more easily and quickly than those in large, thinly populated terri-
tories. In general, companies often seek a rough balance between the two criteria.
Alternatively, they may pay somewhat lower commissions in areas of high potential, or
decide to place the better or more senior salespeople in the more attractive territories.
Product-structured salesforce
A geographically structured salesforce runs into problems when the products are
diverse and highly technical. Salespeople may then lack the knowledge to sell to
sophisticated buyers. One solution often adopted is divisionalising the company
along product lines, with each having separate specialist salesforces. While this makes
for a more technically equipped team, it can have the disadvantage of a customer
being called on two or more times by different salespeople from the same company.
It also involves extra costs, with several representatives travelling over the same
routes and spending time waiting for the same buyers.
Market-structured salesforce
The trend in most advanced companies today is to structure sales teams around
market segments. For example, a construction materials company, rather than focus-
ing its salesforce around concrete, aggregates, sealant products, etc., will organise
them into teams focusing on different types of customer, such as residential construc-
tion companies, roads, water and utilities. The logic of this approach is that
developing a partnership with a customer and selling value requires that salespeople
are able to be problem solvers. To do this, salespeople need to be experts on the mar-
keting and technical problems that customers face.
Even in low-technology businesses, detailed customer knowledge is crucial. As noted
earlier, customers in different segments normally pay quite different prices even for a
commodity product. This is due to differences in price sensitivity and buying power.
However, unless selling and information are oriented around customer segments,
these differences are often missed. This is illustrated in Table 10.1. An industrial
chemicals company sells grouts and anchors (used to control shrinkage and stability
in cement) to the construction industry at an average price per ton of almost €56.
However, as shown, there are substantial price differences between segments. If the
sales team can utilise its specialist knowledge to negotiate even marginally higher
prices, the results are enormous in these typically low-margin businesses. For exam-
ple, a 1 per cent price increase could raise total profits by 25 per cent. A 5 per cent
increase would more than double profits. Even if only half the customers could be
upgraded, the results would still be very high. Achieving such value enhancements,
however, requires a salesforce with detailed knowledge of which customers are the
least price sensitive, which are likely to remain loyal, who the key buying influences
are and which companies could benefit from more marketing and technical support.
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Table 10.1
Additional contribution
Capitalising on (€000) from price
differences in price Contribution increases of:
sensitivity across Tons Price Sales
market segments Segment (000) (€/ton) (€000) €/ton Total 1% 2% 5%
Construction 300 45 13,500 7 2,100 135 270 675

Residential 450 50 22,500 12 5,400 225 450 1,125
Industrial 75 84 6,300 42 3,150 63 126 315
Water 43 96 4,128 52 2,236 41 82 206
Transport 127 60 7,380 20 2,460 74 148 369
Power 27 105 2,835 60 1,620 28 56 142
Total 1,022 55.4 56,643 16,966 566 1,132 2,830
Overheads 14,702
––––––––
Profit 2,264 2,830 3,396 5,094
––––––––
Profit improvement (%) +25 +50 +125
Profit improvement if 50% sold at premium (%) +12.5 +25 +62.5
Of course, market- or customer-structured salesforces necessarily involve trade-offs in

product expertise and additional costs. But many companies believe that accepting
such disadvantages is worthwhile in the light of the increased sales and revenues that
can be generated.
Account management structure

One step further than a market-structured salesforce is organising sales people around
individual customers. This further enhances a salesperson’s capacity to sell higher up
the value ladder. Again such structures have become common for several reasons. One
is the increasing concentration in many industries. Today many companies – perhaps
most – have 50 per cent of their business coming from just 20 per cent of their cus-
tomers. This is true for all sectors – industrial, consumer and service companies. A
second reason is the increased centralisation of buying decisions. Many organisations
have shifted from decentralised buying by SBU to centralised buying that utilises more
effectively the company’s buying power. A third factor is the increasing complexity of
buying–selling relationships. The more functions and people are involved, the greater
the co-ordination that becomes necessary. As a result, many organisations have cre-
ated account managers who lead the sales relationship with a specific customer and
make sure these key relationships are maintained and enhanced.4
This structure is discussed further later.
Hybrid structure
In practice, many companies find it effective to adopt a combination of two or more
structures. A company such as Unilever will have one salesforce for its household and
detergent products, another for food and drinks, and another for personal care prod-
ucts. Representatives within each product group have individual sales territories.
Alongside the geographically based representatives are national account managers
who sell to the big central buying groups such as Sainsbury and Carrefour. In these
complex structures, managers seek to achieve the required combination of product
expertise, geographical cover and customer specialisation.
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Structure and size
Determining the size of the salesforce

How many salespeople does an organisation need? The answer depends upon two
factors. First, it depends upon the strategic judgement of management about the rela-
tive effectiveness of direct sales as against other ways of communicating and selling,
such as advertising, telesales and direct mail. Salespeople are very expensive and it
may be more efficient to replace direct selling by telesales or the Internet for small,
low-value accounts. Second, it depends upon estimating how sales and profits will
respond to additional salespeople.
In practice, companies approaching this problem use one of three approaches.
Workload approach
The most common method is to decide the number of salespeople from an estimate
of the total selling time needed to do the job. It involves the following steps:
1 Group customers by type of account (e.g. size, type of end user, potential).
2 Determine call frequencies for each type of account, i.e. how many calls a year
each type of customer should receive.
3 Calculate the total workload by multiplying the number of accounts by the target
call frequencies.
4 Estimate the average number of calls a year that a salesperson can make.
5 The size of the salesforce is then the total workload divided by the average call rate.
For example, if a company has 200 type A (high potential) accounts, 300 type B and
500 type C (low potential), and the target call rates are 26, 12 and 6 calls per year,
then the total workload is 11,800 calls. If an average salesperson can make 600 calls a
year, then the company needs 20 salespeople.
While the workload approach is simple to operate, it does not necessarily lead to a
particularly good solution. The call frequency rates are often chosen quite arbitrarily.
Managers need to evaluate what would be the effect on sales and profits of higher or
lower call rates. Similarly, they need to explore other methods such as direct mail or
telesales for dealing with small accounts.
Sales potential method

A more scientific approach is to seek to forecast how sales would respond to an
increasing number of salespeople. One method was suggested by Semlow, who
noticed the obvious point that the bigger the territory a salesperson has, the more
difficult it is to achieve intensive coverage. In the company he analysed, a salesper-
son with a territory consisting of 1 per cent of national potential achieved €160,000
sales; one in a territory with 5 per cent of the total potential obtained sales of
€200,000, or the equivalent of only €40,000 for every 1 per cent of potential.5
Using the above results, if a company employed 100 salespeople and gave them terri-
tories of equal sales potential (1 per cent each), then total sales should be €16 million
(i.e. 100 × €160,000 sales per 1 per cent of potential). If it employed only 20 sales-
people, each would have to have 5 per cent of the potential, and sales should be €4
million (i.e. 100 × €40,000). By such reasoning a sales response curve as shown in
Figure 10.4 can be estimated. Semlow then used information on profit contribution
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Sales (£000)
S1
Profits
N*
S0
Figure 10.4
No. of sales people
The salesforce
response function
margins and the costs of employing salespeople to estimate the salesforce size that
maximised profitability.
This is an interesting approach, but its application is fairly limited. First, it requires a
sufficiently large number of sales territories to estimate the response curve statistically.
Second, it assumes that it is desirable to create territories of equal sales potential.
Finally, it assumes that sales productivity is a function only of territory potential and
is unaffected by the mix of accounts in an area, local competition and other factors.
Expert estimation
In recent years, another approach to estimating the response curve illustrated in
Figure 10.4 has been developed. This involves using the expert judgements of man-
agers. Managers are asked to estimate sales levels that would be obtained as a result of
five different scenarios:
1 No salespeople employed (this gives an estimate of S0 in Figure 10.4).

2 Half the current salesforce.
3 Maintaining the current salesforce.
4 A 50 per cent increase in the size of the salesforce (this together with 2 above gives
an estimate of the shape of the curve).
5 A salesforce sufficient to saturate the area completely (this gives S1).
Usually a number of managers who are closely involved with the market put in their
separate estimates. Then the answers are compared, differences are discussed and a
consensus projection is developed. Once the sales function is estimated, profit mar-
gins and cost figures can be applied to the revenue projections and the optimal
number of sales people (N* in Figure 10.4) estimated.6
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Allocation of resources
Allocation of resources
A salesforce is a very expensive resource and there are usually enormous opportuni-
ties for management to improve its efficiency and effectiveness. These opportunities
lie in three areas. First, the proportion of selling time can be increased. Typically, only
30 per cent of a salesperson’s time is spent with customers. McDonald estimated that
in the UK 50 per cent of the average salesperson’s time is spent travelling, 20 per cent
on administration, 24 per cent on making the call and only 6 per cent on selling.7 It
is easy to see how better route planning and more efficient administration could
increase selling time substantially. Yet few companies undertake systematic studies of
how their representatives use their time. Second, the allocation of sales time can be
greatly improved in most companies. Typically, a company’s products and customers
differ greatly in potential. Yet most do not systematically direct salespeople towards
the high-potential products and customers. Finally, the profit generated from a
sales call can usually be significantly increased by better training. Most salespeople
are volume rather than profit driven, and are not trained or motivated sufficiently
to present the real value of what they offer to customers. As a result, prices and
margins suffer.
Allocation to customers
The 80:20 rule invariably applies in selling – the most important 20 per cent of cus-
tomers will account for half of sales, and the other half will come from the remaining
80 per cent of customers. The first task is to split current customers into those of high
potential (or key accounts) and low potential. This task is fairly easy; the more diffi-
cult one is to identify prospects or potential new customers and to segment these by
potential. The 80:20 rule is even more striking when it comes to prospects, the vast
majority of whom will represent a wasted effort. It is important therefore to develop a
system that partitions prospects into A, B and C categories and allocates efforts pro-
portionately. Type A prospects are those 10 per cent of buyers who are likely to
represent 50–60 per cent of the new business generated in the next year or two. Type
B prospects are the next group of customers, who might bring in 20–30 per cent of
the new business. Type C customers are small buyers or those where the chances of
developing a relationship do not look bright.
After defining the customer and prospect sets, call rates should be defined for each
group. The key principles are first to make sure that sufficient time is allocated to
both new and existing customers. Most salespeople are more comfortable developing
existing customers with whom they have an established relationship and sales man-
agement must ensure that the opportunities presented by new customers are not
overlooked. While current customers may represent higher short-term potential than
new ones, as markets change, existing customers may become less important with
emerging new ones presenting growth opportunities. Companies should therefore
build in appropriate call rates for current customers and, in particular, the key
accounts. Next, adequate call rates should be assigned to category A prospects and
lower ones to B prospects. For type C prospects, management should look at more
cost-effective solutions such as the Internet, telemarketing or direct mail. These are
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much cheaper. For example, a telesales person can contact up to 50 prospects a day as
against around 4 for a salesperson.
In recent years, management scientists have developed a number of computerised
models to assist in these allocation decisions. These employ data and management
judgements to optimise the allocation of salespeople’s time among the different types
of account and between current customers and new prospects.8 As with many other
models, they are more applicable where companies have large salesforces selling a
limited number of products.
Allocation to products
Most salespeople sell a range of products. Typically, products vary greatly in their
profitability and responsiveness to selling effort. The task of management is to group
products by profit contribution rate and sales responsiveness, as illustrated in Figure
10.5. This groups products into four types:
■ Top priority. These high-margin, high-response products should receive the highest
call rates and be the primary focus for selling. These are often new products which
require market development.
■ Second priority. These respond well to additional selling efforts, but they generate
less profit on account of their low margin. A product with a 20 per cent profit con-
tribution has to achieve twice the sales response to justify a representative’s time
than a product with a 40 per cent margin.
■ Low priority. These high-margin, low-response products are the next priority. These
generally mature products are well known to customers and sales people cannot
add much.
■ Minimum effort. These low-margin, low-response products should receive the least
resources.
Again there are various models that utilise these profiles to help management allocate
the time of sales people to the various products.
Top-priority Low
High products priority
Product
contribution
margin
Second Minimum
Low priority effort
High Low
Figure 10.5
Selling: product Sales response rate
allocation model
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Sales management
Allocation to territories
From time to time, firms have to design or redesign sales territories. In defining areas,
management will want to meet several objectives. First, they will want to minimise
travelling time and costs. This leads to a preference for circular territories of densely
spaced accounts. Second, territories should be roughly equal in either workload or
potential. This results in a feeling of equity and enhances motivation among the
salesforce. Finally, territories should be clearly defined and permit a rational evalua-
tion of sales people’s performance. Management scientists have developed
computer-based programming models to help design territories along these lines.9
Sales management
The tasks of sales management normally cover recruitment, training, supervision,

motivation, compensation, planning and evaluation. In developing these activities,
management should have the following priorities in mind:
■ Building sustainable customer relationships. Long-run growth and profitability are

more likely to be achieved by having salespeople forge partnerships with clients
based upon shared benefits. Focusing on closing one-off deals, however profitable
they may be in the short run, is unlikely to create sustainable profits. Always
remember that an existing customer is invariably more valuable than a new one,
and make sure that good current customers receive the top priority.
■ Selling on value rather than price. Buyers will naturally seek to push down the price.
The salesperson’s job is to prevent this by adding value to the offer and demon-
strating this. Value selling requires exceptionally high levels of motivation and
training.
■ Customer segmentation and positioning. Effective selling requires representatives to
segment markets because different customers have different needs and price sensi-
tivities. Salespeople have to be trained to position these offers to the different
segments, to build value-enhancing relationships and to negotiate good terms.
■ Augmenting the offer. Few salespeople today are selling products that are substan-
tially better than, or even different from, those of competitors. Marketing and sales
management have to build supplementary values to augment the core offer. These
include guarantees, services, financial support and consulting on technical, busi-
ness and organisational issues that allow the company to be differentiated and
move up the value ladder.
Recruitment
The firm’s success at selling depends upon the quality of the people it hires. For larger
salesforces, hiring is an almost continuous activity because of the high turnover of
salespeople, which can easily reach 25 per cent a year. Mistakes are costly. Few com-
panies avoid a long tail of poorly performing salespeople. Typically, half the
salesforce will generate over 80 per cent of the sales achieved. The cost of recruiting,
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training and financing a salesperson in the first year can be around €120,000. If the
profit contribution margin on the sales is 30 per cent, then the salesperson needs to
generate €400,000 sales to recover the cost. A poor salesperson’s inability to achieve
adequate sales, however, may be only the tip of the iceberg. If they lose current cus-
tomers, the losses may be appalling. A customer currently buying €100,000 a year
may represent an expected discounted sales value of up to €1 million over the next
decade. Worse, disaffected customers tell others, so that before long the company’s
reputation in the industry can be destroyed.
Much empirical research has gone into seeking to identify the characteristics of high-
performing salespeople.10 Most studies show that successful performers have three
broad traits:
■ A high achievement motivation. They have an urgent personal need to be a winner.
■ Empathy. They can understand the feelings of buyers and build warm personal rela-
tionships.
■ Self-confidence. They believe they have the expertise to meet the needs of
the customer.
But these generalisations provide at best very broad guidelines for selection.
Successful salespeople appear to come in many guises: some are extrovert while
others are introvert; some are well turned out, others dress rather shabbily; some are
exceptionally energetic, others are laid back. In addition, the required characteristics
vary greatly with the job. The salesperson from Rolls-Royce negotiating multi-million
pound deals for jet engines requires very different skills from a Unilever representa-
tive selling detergents to cash-and-carry operators.
The identification of selection criteria should therefore start with an analysis of the
selling job to specify the responsibilities and tasks required. This will suggest the edu-
cation, training, experience and personal characteristics needed. These will provide
the data for a first-line screening procedure. Management will then want to supple-
ment this with interview impressions, recommendations and, perhaps, attitude and
personality testing. Finally, one needs to add that selling has not been seen as an
attractive job. Many people dislike the pressures and travel involved, and perceive it
as a low-status occupation. These views are perhaps changing for the better, but out-
standing candidates are usually in scarce supply. Companies have to market
themselves to attract the best people. They need to demonstrate the potential of the
job, the rewards and the career progression that can be offered.
Training
Many companies recruit salespeople and put them in the field without adequate train-
ing. As a result they enter a selling situation with inadequate knowledge of the
customers’ business, the technologies involved and the strategies of competitors. What
happens then is that the salesperson lacks the expertise and confidence to exploit any
differential advantages that the business possesses and ends up giving away margin.
Companies such as ABB, Nestlé and GSK will spend 5–10 per cent of the salesforce
costs on training. Proper training can easily boost a salesperson’s productivity by
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Sales management
20 per cent and boost profit margins by much more.11 The core components of a
sales training programme should include the following:
■ Understanding customers. Salespeople need to be trained to segment markets, to

understand the customers’ business and to analyse how decisions are taken. They
also need to know about the strategies of competitors.
■ Understanding the company, its products and technologies. Salespeople should be
trained to be seen by buyers as experts and authorities on the products, services
and technologies they represent. The buyer should see the representative as a
source of advice and wisdom.
■ Analysing the decision-making unit. A buying organisation can contain many
decision-makers and influencers. Each may have different technical priorities and
price sensitivities. It is important that the salesperson influences the right people
in order to optimise the relationship.
■ Planning and resource allocation. Salespeople need to be trained to plan their time
effectively, to identify the balance between current and new accounts and to pri-
oritise prospects.
■ Creating value for customers. Most importantly, they need to be trained to show
how customers can obtain superior performance or lower costs from building a
close relationship between the two businesses. They need to know how to focus on
profit and value rather than on volume and price.
Motivating sales people
A few salespeople are inherently highly motivated to succeed. But most can have
their motivation levels enhanced by the right type of stimulus. Certainly in today’s
competitive markets, if a company’s salespeople do not possess an urgent drive to
succeed, they will not be able to create and maintain strong customer relations.
It is particularly easy for salespeople to lose their drive and slip into a vicious circle of
depression, dissatisfaction and failure. Selling is a highly pressured job: failures are
usually very visible, the representative works alone for much of the time and fre-
quently lacks authority, and the salesperson is perceived to have a lower status than
buyers. Not surprisingly, the best sales managers view motivational skills as crucial.
The principles of motivating a sales team are illustrated in Figure 10.6. This shows the
potential of creating a virtuous circle of highly motivated salespeople leading to
greater effort, which in turn results in higher performance, higher rewards and
greater job satisfaction. The model shows that sales management can intervene by
stimulating motivation and providing effective rewards. The ways in which manage-
ment can motivate people are as follows:
■ Inspirational leadership. Some managers have charismatic personalities that inspire

their teams to work at high levels of performance.
■ Positive effect. Salespeople usually respond positively to praise, positive feedback,
warmth and understanding from their managers.
■ Persuasion. Teaching salespeople new techniques that will help them sell and per-
form better are also motivational.
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Motivation
Satisfaction
Effort
Reward
Performance
Figure 10.6
Motivating the
salesforce
■ Performance goals. Sales quotas encourage people to aim high if the quotas are
agreed and perceived as reasonable.
■ Supplementary motivators. These include sales meetings, which encourage individu-
als to identify with a larger peer group, and competitions, which offer them the
chance to win prizes or recognition for special effort.
If management can motivate extra effort, they also need to reward the performance
improvements that result. Research suggests that the rewards that are most wanted by
salespeople are, in descending order of importance:12
■ Financial rewards. First, they expect to receive salary raises, commission or bonuses
for achieving good results.
■ Promotion. The best salespeople expect to be promoted to higher-status positions
and to get enhanced career opportunities.
■ Personal growth. They want to feel that they are moving forward. Further training
and new experiences provide positive rewards.
■ Sense of accomplishment. Visible successes satisfy the intrinsic need for achieve-
ment felt by most salespeople.
In contrast, research suggests that liking and respect, security and recognition are less
valued by high performers.
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Sales management
Box 10.3 Phones 4 U

In 2003 A Staffordshire mobile phone tycoon gave his staff the chance to earn a £1m bonus.
John Caudwell, the multi-millionaire owner of the high street mobile phone retailer, Phones 4 U, set out
what he called the retail industry’s largest staff incentive scheme.
Twenty-five sales directors, among hundreds of Phones 4 U workers attending a company conference, were
then told they could earn as much as £1m in bonuses if they hit their targets. Anybody could do it!
The money will not be a problem for Mr Caudwell – who had raised more than £400m from the sale of
another of his companies, Singlepoint.
He said: ‘I started off as an engineer with a bag full of spanners and here I am now.
‘Anybody could do it – well not anybody could – but a lot of people could do it.
‘It just needs the will, the determination and somebody to give them the opportunity.’
Mr Caudwell said another £10m has been set aside for sales and shop managers.
Compensation
What and how salespeople are paid has a major impact on a company’s ability to
recruit good people and to stimulate high performance from them. Many different
compensation methods are employed by companies. The most common alternatives
are straight salary, commission only, salary plus bonus, salary plus commission, and
salary plus bonus plus commission.
There are two aspects of compensation that have to be decided: the level and the
composition. The level of pay is important in determining the company’s ability to
attract and retain good people. If a company pays under the market rate, then it is
hard to get able salespeople. If it pays more, it should pull in potential high perform-
ers. However, it is not easy for candidates to judge fine differences in levels of
compensation. Differences in the way bonuses or commissions are calculated often
make simple comparisons misleading.
Deciding the composition of compensation and, in particular, the split between fixed
and variable pay is more complex. Salespeople want pay that is regular, but they also
believe that above average performance should be rewarded, and that pay should
generally increase with age and experience. The company, on the other hand, wants
a pay system that motivates a certain behaviour, which is economical and simple to
operate. The specific scheme that a company employs reflects its own balance
between these different goals. There are three main alternatives.
Straight salary
Around one-third of salespeople are paid a straight salary. The advantages are that it
gives sales people a predictable income, and for the company it is easy and simple to
administer. It also makes it easier for management to change duties without the sales
people feeling that they are going to be worse off.
It does have some major disadvantages. First, it does not reward high performance.
This can be a real problem in today’s highly competitive environment. Second, it
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makes all selling costs fixed: if the company’s sales decline, salaries remain the same.
Third, it does not incentivise sales people to focus on the products and customers
offering highest potential.
Straight salary can only really be justified where it is difficult to disentangle a sales-
person’s contribution to sales, when other factors such as advertising or promotion
are the major determinants of demand, or when the salesperson plays predominantly
a supportive role. Straight salaries are also often used when selling is performed by a
team, or when negotiations cover a long period of time. However, even in these cir-
cumstances, management should consider whether some sort of bonus scheme
would give the representative a more direct financial interest in results.
Straight commission
This is the opposite of a straight salary. Here the salesperson is paid a percentage of
either sales or gross margin, usually 3–20 per cent depending upon the product.
Straight commission is used in only a few areas, such as door-to-door selling, insur-
ance and office equipment.
A commission-only system has three advantages. First, it provides a powerful incen-
tive to achieve results. Second, by varying the commission rates, companies can
motivate salespeople to allocate their time to strategic products or customers. Finally,
selling costs become variable: when sales are low so are costs. There are, however,
often major problems with this type of plan. Salespeople may be demotivated by the
highly unpredictable pattern of their incomes. Also they will resent undertaking
activities that do not generate immediate income, such as collecting market research
information, providing customer service or following up long-term opportunities.
They may encourage high-pressure selling tactics or price discounting, which may
not be in a company’s interests.
Mixed plans
Not surprisingly, most companies compensate sales people using a combination of
salary, commissions and bonus. This way they try to get the best balance of a salary
element that salespeople can rely on, plus a variable element to motivate higher
performance. Typically, 70–80 per cent will be salary and the rest commission or
bonus payments.
In fixing bonuses or commissions, management can base them upon sales or gross
margin performance. The latter is generally much better. Sales-based incentives invari-
ably encourage salespeople to give way on price and exaggerate the price sensitivity of
customers. It is tough to get salespeople to undertake difficult, but essential, value sell-
ing if they are paid for shifting volume rather than generating profitable sales.
Evaluating performance
Effective control of the sales effort requires establishing standards and measuring per-
formance against them. The objective of such a measurement system is to distinguish
between high- and low-performing salespeople, and to identify how differences in
effort, ability and efficiency have contributed to such variations. Unfortunately, there
are two reasons why this task is not straightforward. One is that there are many
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The selling process
different measures of performance that may not be correlated, particularly over the
short run. Such measures include sales, market share, gross profits, new accounts,
customer satisfaction ratings, number of calls made, selling costs and supervisors’
ratings. Second, performance may be affected by factors other than the efforts of
salespeople. Such factors include competition, other forms of promotion, economic
variables and special market conditions.
If the company has a reasonably sized salesforce, the performance of representatives
can be compared against each other. Performance can also be compared over time.
Such comparisons can be used to screen out the effects of some of the exogenous
variables that affect performance.
Performance variables can be divided into input and output measures. Input measures
reflect the efforts and costs that a salesperson incurs. Effort variables include the
number of calls made and the time spent in selling activities. Expense variables
include travel and entertainment costs.
Output measures are generally more useful. They can be divided into three types. First
are sales measures. The most important of these are total sales and percentage of
quota achieved. The latter is generally more relevant in that, if a quota is carefully
set, it allows for the differences in opportunities among territories. Thus it reflects
more accurately the salesperson’s ability to generate revenue. New business generated
is another important sales measure.
A second type of output measure is the profit generated by a salesperson. If sales
people are evaluated on sales measures alone, they can erode margins by making
insufficient effort to sell at adequate prices. It is usually crucial to incentivise sales
people to push the right products at the right prices.
A final type of output measure is qualitative ratings of the salespeople by customers
and supervisors. Regular surveys of customers are being increasingly used for evaluat-
ing sales people. Top companies such as GE, Microsoft and IBM are realising that the
best way of creating satisfied customers is systematically to collect information on
customer satisfaction and incentivise customer contact personnel to achieve high
levels of satisfaction. Companies are realising that strong customer evaluations today
represent sales gains tomorrow.
The selling process

Some people appear to be natural salespeople: they have an instinct for understand-
ing the aspirations of customers and for motivating them to want what they can
offer. But today selling has become more professional. A large amount of research and
a vast collection of experiences have allowed experts to put together a convincing,
and generally accepted, sequence of good selling practice. While flair and instinct
will still allow some individuals to be outstanding, we know enough to train most
people to be effective at selling.
It is useful to distinguish between the old-fashioned sales-oriented and the modern
customer-oriented approach to selling. The sales-oriented approach involves the use
of high-pressure techniques of persuasion to manipulate the customer into buying
what the salesperson has. It may involve intruding into the buyer’s office or home,
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exaggerating the features or benefits of the product, fast-talking presentations and

inflated concessions to obtain quick agreement. In the past, such an approach has
often been associated with people selling cars or encyclopedias. Today, however, such
approaches are either illegal or generally ineffective. Certainly, they can never be the
foundation for building long-term customer relationships.
Modern selling is based upon a customer-oriented approach. It focuses on finding out
what customers want and coming up with solutions that match these wants in a way
which is profitable to both parties. This approach is highly professional and requires both
skill and integrity. The first skill is in helping customers to articulate their real wants. The
salesperson may be able to bring a breadth of business, marketing and technical skills to
illuminate and bring further insights into the buyer’s underlying problems and needs. A
highly trained salesperson should have information and knowledge not possessed by the
buyer. The second skill is getting the buyer to understand what value a solution would
bring. This value may be economic – higher profit for a business buyer – or psychological
– pleasure, confidence and self-esteem for a household consumer. The third skill is
coming up with a solution that matches the wants of the buyer. Real value is generated if
the salesperson can offer the customer enhanced satisfaction, greater output or higher
productivity. The fourth skill is in building the foundations for a long-term business rela-
tionship by demonstrating a commitment to the customer’s performance.
The key steps in the selling process are summarised in Figure 10.7.
Identify
prospects
Pre-approach
Approach
Pre-close
Presentation
Objection
handling
Close
Follow-up
Figure 10.7
The selling process
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The selling process
Prospects
The first step in the selling process is to identify prospects – people who are likely to
buy. A prospect is someone who can benefit from buying from the company, can afford
to, and has the authority to make a purchasing decision. A lead is someone who might
possibly be a prospect. A lead must be ‘qualified’ before it can be considered a prospect.
Leads may come from many sources. Current or past customers are normally the best
source of additional business. Classified lists and directories, advertising, exhibitions
and references from service personnel, dealers, bankers, trade associations and suppli-
ers are all used to generate leads. To avoid wasted calls it is important to ‘qualify’
serious leads. Qualifying means investigating whether a lead possesses the three
qualities of the prospect:
■ Could it benefit from what the salesperson can offer?
■ Is there the money to buy it?
■ Has the person identified the authority to buy?
Pre-approach
Once a prospect is identified, the salesperson will need to draw up a sales plan cover-
ing selling objectives and strategy. Such a plan depends upon information about the
customer. During this planning stage, the salesperson should seek to research four
main issues. First, additional qualifying information is needed. Is the prospect really
in the market? When is it likely to buy? What is the value of the prospect? Second,
the salesperson will want information about the decision-making unit. Who will
influence the choice process? Who are the key decision-makers? How are decisions
arrived at? Third, the salesperson will want information for planning the presenta-
tion. In particular, what are the likely needs of the prospect and what benefits should
be emphasised? Finally, the salesperson will want to learn about the nature of the
competition. How satisfied is the prospect with the existing supplier? What are the
comparative strengths and weaknesses of the prospect’s company? Sources of this
information will include other sales representatives, annual reports, trade journals
and directories. Generally, the best source will be the prospect itself. If the salesperson
looks genuinely helpful, the prospect is likely to be willing to talk on the telephone
or in person about the business and its needs.
Approach
Once the salesperson is sufficiently prepared, a meeting will be sought with the
prospect. This begins the sales process proper. The approach stage should consist of
three sections: the first probes the buyer’s wants; the second confirms that the want
list is complete; and the third section seeks to value fully the benefits which arise
from a solution.
The probing stage can be separated into several steps. The first is asking what the
buyer is looking for – what benefits are sought. It means listening to the prospect and
noting down essential requirements. The next step is to explore whether these
requirements should be modified. The reason for questioning the buyer’s list is that
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the customer may not be aware of new technologies or solutions that may be avail-
able now. The sales representative may be able to advise on better approaches that
will benefit both of their companies.
During this process, the salesperson should anticipate that, sooner or later, the buyer is
likely to come up with objections that may prevent an agreement being signed. These
objections may be excuses because the buyer does not want to deal with the company,
or they may be real problems from a perceived mismatch between what the salesperson
is offering and what the buyer wants. During the approach stage it is best to anticipate
such objections and pre-handle them to prevent them later becoming obstacles. For
example, common objections at the end of the sales presentation are that the buyer
does not have the authority to make a deal, or that the budget is insufficient. At an
early stage the salesperson can seek to anticipate such problems by asking, for example:
‘Are you able to make the decision yourself, or does it have to go higher?’
Once the buyer’s list of requirements is complete the salesperson can seek to intro-
duce any differential advantages that their company can offer. This might mean
highlighting certain of the buying criteria where the offer is particularly strong, or
introducing new benefits such as guarantees, fast delivery or back-up service. Stage
two of the approach requires the salesperson to confirm with the buyer that the list
of requirements is complete. The representative will not want the buyer to start
adding criteria later, which will in effect act as objections to closing the deal. The
final stage of the approach seeks to put a value on the benefits being sought by the
buyer. If the salesperson offers a solution to the list of requirements, what will it be
worth to the buyer? If it is an industrial firm, the salesperson and the buyer should
calculate the economic value of a solution in terms of the lower costs that would be
achieved, the higher output or the enhanced quality. It is crucial that the buyer
appreciates the value of any solution that the salesperson may subsequently offer.
This way the salesperson focuses the negotiations on value rather than price. This
ability to create and demonstrate value to the customer is the single most important
skill possessed by a top salesperson.
Pre-close
At the end of the approach phase, the salesperson should move on to the pre-close.
The buyer is asked: ‘If we can develop a solution that will match your requirements,
have we a deal?’ The purpose of the pre-close is to expose any final doubts in the
buyer’s mind and to ensure that the development and presentation of the solution by
the seller will not represent a fruitless waste of resources.
Presentation
Sometimes the salesperson can immediately begin the presentation of the solution.
But for complex products or buying situations it might be many months before the
seller can develop the required product. Once the company produces an effective
solution, the presentation stage should be straightforward if the salesperson’s
approach work has been thorough. The presentation should not be a showy
extravaganza or high-pressure set piece. Instead the simple objectives should be to
show how the company meets the criteria agreed with the buyer and confirmed at
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The selling process
the pre-close. In general, the presentation should begin with a review of the criteria
as agreed with the buyer and a detailed re-elaboration of the economic value placed
on a solution. The salesperson should then proceed to present the company’s solu-
tion, checking off point by point against the buyer’s criteria. If the buyer then
confirms that the solution matches requirements, the salesperson can go straight to
the closing stage of the selling process. If, on the other hand, the buyer raises prob-
lems, the salesperson has to move to the objection-handling phase.
Handling objections
During the presentation, or when asked for the order, many customers will bring up
objections. These may be either real problems or simply psychological resistance to
signing the order. Common objections are as follows:
■ It is not the right specification.

■ It’s too expensive or I have not got enough in my budget.
■ I cannot do anything until my boss has agreed it.
■ I am happy with my present supplier.
The best approach to objections is to have anticipated them and pre-handled them at
an earlier stage. Difficulties on the specification, for example, should have been
resolved during the approach phase. Similarly, a problem over price should have been
identified earlier and been outweighed by building up an appreciation of the addi-
tional value incorporated in the company’s offer. The salesperson should have shown
how the offer generates real cost savings or increased profits for the buyer that signifi-
cantly offset the price premium.
If objections do occur, they have to be dealt with in a very positive way by the sales-
person, who should first ask the buyer to clarify the problem. For example, an
objection that the price is ‘too high’ could mask several different meanings such as:
the buyer wants a discount; it is outside their budget; it is more expensive than antic-
ipated; or the buyer is not the decision-maker. Each of these meanings requires a
different type of response if the problem is to be handled. Once the objection is clear,
the salesperson can seek to ‘outweigh’ it by showing compensating benefits, ‘remove’
it by demonstrating that it is not important in the buyer’s situation, or ‘weaken’ it by
showing that it is not a serious problem in practice.
Closing
Finally, the salesperson needs to close the sale by asking the buyer for the order.
Many salespeople are poor at closing deals: they often lack confidence or fear embar-
rassment if their move is rejected. However, if the selling process has been done
properly, the salesperson has little to fear and the buyer should want to wrap up the
deal. General principles that apply to closing are that it should be made clear that the
salesperson now wants the buyer’s decision, not by hinting or making vague state-
ments, but rather by asking a straightforward question that requires a direct answer
from the buyer. However, the seller should not seek to close too early, but should
only ask for the order when the matching is complete and a real understanding of
the value of the offer has been created. Salespeople use a variety of techniques to
close. These include the following:
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■ The direct method. The simplest and often the best approach is just to ask: ‘Can I
get your signature now for my order form?’
■ The assumptive close. The salesperson assumes that the sale is agreed and asks, for
example: ‘To whom shall I send the invoice?’
■ The alternative close. ‘Would you like it sent this week or will you have it at the
beginning of the month?’
■ Standing-room-only close. The salesperson suggests that the opportunity to buy
might be lost if the buyer does not agree now, e.g. ‘It is the last one we have’ or
‘The price goes up by 20 per cent after this week’.
■ Special inducement. ‘If you buy now, you get a free …’ will often prod prospects
into prompt action.
Maintaining relationships
The salesperson will not just want a one-off deal, but will want rather to build a long-
term relationship with the client that can be the source of business for years to come.
For this reason the sale should be followed up to make sure that the product works as
promised and that the customer is happy with the service, and to express that the
company has a continuing interest in helping the customer resolve its problems and
capitalise on its opportunities.
Negotiations
Negotiations and selling are closely related. In some simple selling situations, the
seller independently defines the product and the price and seeks to persuade the
buyer to purchase on these terms. However, the situation is frequently more complex
and the contract, including the product, price and terms of payment, is negotiated
between the buyer and the seller. Negotiation can be defined as the process of
coming to a mutually agreed exchange. Negotiation, like selling, has become a highly
professionalised discipline that can be learned by managers.
The two fundamental characteristics of negotiation are the existence of at least two
parties, each of which has something of value to offer, and the voluntary decision to
make an exchange. The aim of a negotiation is to reach an agreement. A good agree-
ment should conclude with all parties satisfied, it should be reached efficiently and it
should be concluded amicably. Such conditions facilitate future exchanges between
the parties.
Types of negotiation
Negotiations differ in their complexity and in the problems of reaching an agreement.
■ Number of parties. The most straightforward type of negotiation is between two

parties: a buyer and a seller. But some negotiations have multiple parties: for exam-
ple, the General Agreement on Tariffs and Trade (GATT) negotiations have 140
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Negotiations
parties to satisfy. Also sometimes a negotiator may be representing a coalition of

interests, not all of whom may be willing to agree to the terms that the negotiator
is offering or willing to accept on their behalf.
■ Number of issues. Some negotiations focus on a single issue such as price, while
others may have a whole range of items to agree. The negotiator will have to
decide which of the issues are most crucial and in which order to take them.
■ Continuity. Negotiating attitudes will be affected by whether it is a one-off deal (e.g.
selling a house), or one of a continuous series (e.g. between a retail chain and a
grocery manufacturer). For the latter, it is particularly important that both parties
feel that the deal struck is a fair one.
■ Strategies employed. The negotiator’s attitudes and strategies affect the process.
If a negotiator is hostile and disagreeable, the chances of an efficient settlement
will diminish.
Negotiations can be divided into three phases: pre-negotiations, the negotiating

phase and post-negotiations.
Pre-negotiating phase
This is the planning phase, during which negotiators gather information and plan
their negotiating strategy. Top negotiators regard this as the most important phase of
the negotiating process, and they often rehearse and role play with colleagues to sim-
ulate the forthcoming meetings. In this planning period, the negotiator should
consider the following issues:
■ What are the negotiator’s own key objectives?
■ What are the objectives of the other party?
■ What information is needed? The negotiator needs information to legitimise

demands. The negotiator needs to judge the reliability of the other party, and to
know whether the other party has the ability to make agreements.
■ What are the negotiating conventions? For example, how long will the negotia-
tions be allowed to proceed? If there are multiple issues, in which order would
they be best negotiated?
■ How can good relationships be built up with the other party? How can the other
party be encouraged to be reasonable, reliable and constructive? How can our posi-
tive approach be communicated to them?
■ What is the settlement range that the negotiator will consider? Negotiators should
plan an upper and a lower limit. The maximum supportable position (MSP) is what the
negotiator would really like to achieve. This should be ambitious, but at the same
time it has to be sufficiently reasonable that it can be justified and legitimised during
the negotiation. The best alternative to a negotiated agreement (BATNA) is the mini-
mum amount the negotiator will accept. Below this floor the negotiator will be
prepared to do without a settlement. By keeping the BATNA in mind, the negotiator
can avoid being pressured into an unsatisfactory agreement.13
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Negotiating phase
In commencing the negotiations proper, the negotiator has to choose a style, strategy
and tactics.
Negotiating style
The key to good negotiating is to view the negotiations as a joint problem-solving
exercise. Both parties want a solution and each can prevent a solution unless it is sat-
isfied with the outcome. Good negotiators seek to encourage their opposite numbers
to look on the process as a shared problem of finding a solution that can meet the
constraints of each and provide benefits for all. Effective negotiators seek to create an
environment where they view each other as participants in problem solving rather
than as enemies. They seek to be constructive rather than destructive and to use per-
suasion rather than coercion. Even if the other party refuses to play the game in this
positive fashion and resorts to shouting, irrational behaviour and bullying, it still
pays to respond coolly, reasonably and politely, so that communications are main-
tained for as long as possible.
Negotiating strategy
The strategy is to seek to gain acceptance of your position and to demonstrate that it is
justifiable and compatible with the interest of the other party. For example, in negotiat-
ing a construction contract, the representative will seek to build credibility for the MSP.
They will emphasise the value and benefits of the company’s expertise and seek to raise
doubts about the buyer obtaining another deal that could offer comparable value. At
the same time, the representative will mask the BATNA, thus discouraging the buyer
from discovering the bottom line on price or terms. The representative should also
have inducements and persuasive arguments to increase the buyer’s desire to settle.
Position versus interest bargaining

The most influential new approach to negotiations has developed from the work of
Fisher and Ury and their Harvard Negotiation Research Programme.14 Their ‘princi-
pled negotiations’ approach is built upon four foundations:
■ Separate the people from the problem. Negotiations should specifically focus on
issues and avoid allowing personalities to become involved. If the personalities
and egos of the negotiators become involved, the process can deteriorate into an
emotional and destructive test of wills. Negotiators should therefore be careful to
avoid personal criticisms or accusations.
■ Focus on interests not positions. Interests are the fundamental requirements of the
parties. Positions are specific demands that negotiators use in seeking to achieve
their interests. For example, a buyer’s interest may be in cutting the company’s
operating costs, but ‘my maximum price is €10,000’ is the position taken. Focusing
on interests works better because there may be several alternative positions that
could meet the buyer’s underlying need. These could include free delivery, more
product, greater productivity or financial support.
■ Invent options for mutual gain. If both parties see themselves as problem-solvers,
they can look for solutions that provide gains for both. Brainstorming sessions can
be employed to generate options that offer shared benefits.
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Negotiations
■ Insist on objective criteria. To avoid the risk of negotiations getting bogged down
into opposing positions, the negotiator can propose fair, objective criteria to be
used to arbitrate a settlement. For example, in negotiations over the price of a
property, an independent valuation can be sought from a third party.
Table 10.2 contrasts this type of ‘principled negotiations’ with the more common
positional bargaining employed by untrained negotiators. Some of these positional
bargainers adopt a ‘hard’ stance, while others adopt a ‘soft’ or conciliatory approach.
Neither is particularly successful in practice. Soft approaches often result in ‘giving in’
to a tougher opponent. A hard negotiating stance will often generate a similar
Table 10.2
Problem Solution
Positional versus
principled Positional bargaining: Change the game:
negotiations Which game should you play? Negotiate on the merits
Soft Hard Principled
Participants are friends. Participants are adversaries. Participants are problem-

solvers.
The goal is agreement. The goal is victory. The goal is a wise outcome
reached efficiently and
amicably.
Make concessions to Demand concessions as Separate the people from
cultivate the relationship. a condition of the the problem.
relationship.
Be soft on the people Be hard on the problem Be soft on the people,
and the problem. and the people. hard on the problem.
Trust others. Distrust others. Proceed independent
of trust.
Change your position easily. Dig in to your position. Focus on interests,
not positions.
Make offers. Make threats. Explore interests.
Disclose your bottom line. Mislead as to your bottom Avoid having a bottom line.
line.
Accept one-sided losses Demand one-sided gains Invent options for mutual
to reach agreement. as the price of agreement. gain.
Search for the single Search for the single Develop multiple options
answer: the one they answer: the one you to choose from; decide
will accept. will accept. later.
Insist on agreement. Insist on your position. Insist on objective criteria.
Try to avoid a contest of will. Try to win a contest of will. Try to reach a result based
on standards independent
of will.
Yield to pressure. Apply pressure. Reason and be open to
reasons; yield to principle,
not pressure.
Source: Roger Fisher, William Ury and Bruce Patton, Getting to Yes: Negotiating agreement without giving in. Copyright ©
1981, 1991 by Roger Fisher and William Ury. Reprinted by permission of Houghton Mifflin Co. All rights reserved
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response from the opponent, in which case a settlement often fails to be reached and
both parties are left worse off.
Post-negotiations
After an agreement is reached, effective negotiators turn to the next phase. First, it is
important to make sure that the agreement reached is clear to both sides and that
there is no possibility of misunderstandings souring subsequent relations. All the
essential clauses of the agreement should be written down and signed by both par-
ties. Second, the representative will want to create the basis for a positive long-term
relationship with the party. For this reason, negotiating ‘too sweet a deal’ may be a
short-run victory to be overturned with a vengeance once the loser has the power to
retaliate. Both parties should leave the negotiations with a feeling that the process
has been fair and constructive.
Managing account relationships
Underlying all selling and negotiations should be the aim of building long-term rela-
tionships with customers. But for major customers this aim needs to be translated
into specific organisational arrangements and resource commitments. For many, per-
haps most, organisations today a handful of key customers will account for 80 per
cent of sales and profits. Not surprisingly, more companies are shifting to the
appointment of key account managers whose job is to manage and enhance these
relationships.
The shift to key account management is driven by the following factors:
■ Vulnerability. The loss of one or two key accounts can destroy the profitability of
the company.
■ Commoditisation. Competitors now offer not only products, but also services of
comparable quality. Consequently, companies need to get closer to the customer’s
business to identify new sources of value.
■ Innovation. Customers usually provide the major source of profitable new ideas.
■ Potential business. Current customers invariably represent better prospects for fur-
ther sales than new customers.
Developing an account management programme begins with the identification of

these key accounts. The handful of customers who account for the bulk of the firm’s
revenues and profits should be singled out. Management should put together a list in
descending order of sales of all its customers. At this stage managers should consider
pruning some of the small, low-potential accounts to free up resources for the key
accounts. Next, account managers should be assigned to the major customers.
Managing key accounts requires different skills from traditional selling and negotiat-
ing. The focus is on building personal relationships and creating long-run strategic
partnerships rather than on immediate results. Management must ensure that the
account manager has, or is trained in, the skills of relationship management. Finally,
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Summary
account managers have to develop detailed plans to develop a profitable relationship.

Miller and Heinman identify the following components of a successful account plan:15
■ Charter statement. The charter is like a mission statement with respect to the par-
ticular customer. It states who the customer is (company, subsidiary or division),
what product or services you are seeking to sell and why the customer should buy
from you. The last item is crucial. A sustainable business relationship with a cus-
tomer depends upon being able to help the customer create additional profits. This
means helping it to sell more to its customers, reducing its costs or raising the level
of its productivity. For example, a charter statement for a particular account might
say: ‘We supply construction chemicals to the building division of Alpha
Company that enable it to provide buildings which are superior to those of its
competitors in quality and finish.’
■ Situation appraisal. The situation appraisal establishes where you stand now in rela-
tion to the client. It looks at your competitive strengths and weaknesses, the profit
opportunity that the client’s business presents, the trends facing the client and the
characteristics of the decision-making unit.
■ Account strategy. Strategy starts with the statement of the long-term goal of the rela-
tionship. This should be stated in terms of the value to be perceived by the customer
as resulting from working with the supplier: for example: ‘Our goal is to be seen as
the company which guarantees that Alpha has the best externally finished buildings
in the industry.’ Second, the strategy statement should define what types of resource
(technical, support, research, budget) will be needed to achieve the goal.
■ Implementation. This requires first that the long-term goals are translated into spe-
cific, quantifiable objectives for the next 12 months: for example, what products
will be sold and what revenues will be expected. Second, sales and support plans
should be scheduled. Third, milestones should be set for periodically reviewing
progress and revising the plan where necessary.
Summary
Selling is about communicating value to customers. While most companies employ
specialised salespeople, most managers, and top managers in particular, need to be
heavily involved in selling.
Two factors have changed the nature of selling. One is the increasing concentration in
many industries that makes satisfying certain key accounts essential for the future of the
business. Second is the increasing commoditisation of the products and services that
companies offer. In these circumstances, the traditional focus on selling volume simply
leads to price erosion. Selling today requires finding new sources of value by helping the
customer to increase its total profit or level of satisfaction. Here the salesperson needs
the skills of a consultant, able to analyse the customer’s markets and its manufacturing
operations to identify new sources of business or productivity improvement for the client.
This requires new ways of organising, training, motivating and compensating salespeople.
Companies that manage these processes effectively achieve increased competitiveness,
new sources of innovation and the creation of long-term profitable relations with customers.
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Questions
1 An industrial chemicals company sells the same commodity-like product at rather different
prices to different customers. What is likely to explain such differences and what are the
implications for selling strategy?
2 A company wishes to forge ‘strategic partnerships’ with its key customers. Outline how
such a strategy might be developed.
3 The head of a building supplies company complains that his customers buy solely on price. He
sees no way of raising prices. Suggest some avenues for exploring value-adding strategies.
4 Compare and contrast structuring salesforces by (a) geographically defined territories, (b)
product specialisation, and (c) market or segment specialisation.
5 A new industrial sales manager is determined to raise significantly the margins achieved on
orders. However, her salespeople are insistent that customers are highly price sensitive and
that if they raise prices by 10 per cent they will lose 70 per cent of their business. Why
might the salespeople be overcautious? How should the sales manager proceed if she is
confident that her strategy should work?
6 Compare and contrast the principles of effective selling with the techniques of good
negotiating.
Notes
1. David Jobber and Geoff Lancaster, Selling and Sales Management, 6th edn (London: Financial
Times Prentice Hall, 2003)
2. William C. Montcrief, ‘Selling activity and sales position taxonomies for industrial
salesforces’, Journal of Marketing Research, August 1986, pp. 261–70.
3. Eric von Hippel, ‘Users and innovators’, Technology Review, October 1978, pp. 98–106.
4. Robert B. Miller and Stephen E. Heinman, Successful Large Account Management (New York:
Henry Holt, 1991).
5. Walter J. Semlow, ‘How many salesmen do you need?’, Harvard Business Review, May–June
1954, pp. 126–32.
6. Andreas Drexl and Knut Haase, ‘Fast approximation methods for salesforce deployment’,
Management Science, October 1999, pp. 1307–23.
7. Malcolm H. B. McDonald, Strategic Market Planning (London: Kogan Page, 1992).
8. Sanjit Sengupta, Robert Krapfel and Michael Pusateri, ‘The strategic salesforce’, Marketing
Management, Summer 1997, pp. 33–7.
9. Gilbert Churchill, Neil M. Ford and Orville Walker, Sales Force Management, 5th edn
(Homewood, IL: Irwin, 1999).
10. Erika Rasmusson, ‘The 10 traits of top salespeople’, Sales and Marketing Management, August
1999, pp. 34–7.
11. See, for example, Peter Doyle and David Cook, ‘Evaluating the pay-off of retail training
programmes’, European Journal of Marketing, Spring 1985, pp. 72–83.
12. D. J. Dalrymple and L. J. Parsons, Sales Management (New York: Wiley, 1995).
13. Adapted from Roger Fisher and William Ury, Getting to Yes: Negotiating agreement without
giving in, 2nd edn (Boston, MA: Houghton Mifflin, 1992).
14. Ibid.
15. Miller and Heinemann, op cit.
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‘Management has to embrace

the entire process. It has to be focused
on results and performance
across the entire economic chain.’
Peter F. Drucker
Chapter 11 MANAGING MARKETING CHANNELS
After product, promotion and price, the fourth ‘P’ of the marketing mix is place. More
often this element of marketing management is called distribution. Distribution
management is the set of decisions and processes concerned with the flow of products
or services from producer to consumer.
The term ‘distribution’, however, hides the scope of the issues of concern to
management. Today most companies do not sell and distribute their goods directly to the
final user. Instead many of the tasks, which include distribution activities such as
transportation and storage, but also marketing activities such as selling, pricing and
promotion, are undertaken by a variety of external intermediaries. The choice and control
of these intermediaries we call marketing channel management. Marketing channels are
those interdependent organisations involved in the process of making a product or
service available to end users.
The choice and management of marketing channels are crucial management decisions
(see Box 11.1). Marketing channel costs and margins can easily account for up to 50 per
cent of the price paid by the final customer. Channel efficiency is therefore a key
determinant of the firm’s profitability and cost competitiveness. But channels are also
crucial to the firm’s effectiveness. The capabilities and motivation of the organisations
within the channel determine the business’s ability to create a competitive advantage in
satisfying and servicing the customer. Channel management is one of the most important
ways in which firms add value and enhance their competitiveness.
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Chapter 11 Managing marketing channels
The choice and design of the marketing channel is also strategically important because it
is a long-term decision and not easily changed. For example, a computer company such
as Hewlett-Packard can choose to sell and distribute through its own salesforce, through
direct marketing media, including the Internet, or through an independent reseller. If it
chooses the last, it will need to make a long-term commitment if it is to motivate the
intermediary to invest in and develop its business. If conditions change, or things go
wrong, it is not easy to shift to an alternative channel without a major disruption of the
business. Marketing channel strategy is therefore a major determinant of the firm’s long-
run effectiveness and efficiency. Management guru Peter Drucker predicted that in
twenty-first century business, the biggest change will not be in new methods of
production or consumption, but in distribution channels.
This chapter first explores the tasks of the marketing channel and why managers will
often find it better to use third parties to undertake many of these activities. Second, it
presents the criteria that managers should use in designing a channel strategy. Third, it
looks at how marketing channels should be managed: how channel members should be
selected, motivated, evaluated and controlled. Fourth, it reviews how marketing channels
are changing and looks at the growth of integrated vertical, horizontal and multichannel
networks. Finally, it explores the key logistics decisions that determine distribution costs
and service levels.
Box 11.1 Channel power in ice-cream

The importance of channel management is exhibited in the UK ice-cream market. The market is dominated
by Unilever-owned Walls. Unilever’s dominance here lay not in superior products, lower prices or better
communications, but simply in control of the distribution channels. Years ago it gave freezers to the
hundreds of thousands of small shops that sold ice-cream – with the stipulation that only Unilever’s
products could be stocked in them. During the 1990s Nestlé attempted to challenge Walls’ dominance,
investing heavily in installing its own freezers into retail outlets to compete with Walls. Its lack of success is
demonstrated by its withdrawal from the market in 2001, selling the business to Richmond foods for just
€13m. Mars entered the market in 1989 with an ice-cream version of its Mars Bar brand. It faced a
situation where the traditional distribution chain for its offering was closed to it – the small retailers had
freezers with contractual obligations which prevented them from stocking the Mars brand.
Mars responded by changing the rules of the market and was the first company to successfully utilise
supermarkets as a distribution channel for so-called ‘impulse’ ice-creams. It succeeded by setting a high
price (when launched a Mars Bar ice-cream was twice the price of a Mars chocolate bar and half the
weight) which provided sufficient margin to make the product attractive for the supermarket chains. By
raising the acceptable price threshold Mars paved the way for the growth of luxury ice-cream brands such
as Häagen-Dazs. The success of Mars and the failure of Nestlé may in part be attributable to their different
ownership structures. As a private company, Mars was able to carry the losses associated with developing a
new business whereas the publicly quoted Nestlé was under more scrutiny to demonstrate profit potential
or withdraw.
In this case innovation in distribution contributed greatly to the development of a significant new market
opportunity.
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The role of channels
Figure 11.1 shows the generic value chain describing the activities involved in the
manufacture, marketing, delivery and support of the product or service produced by
the firm.1 Inbound logistics are those activities associated with receiving, storing and
disseminating inputs to the production process. Operations covers the tasks involved
in transforming inputs into the final product form. The activities that can be under-
taken by the firm’s marketing channels are the three remaining areas of the value
chain. These are as follows:
■ Outbound logistics. Activities concerned with collecting, storing and physically dis-
tributing the product to customers, such as order processing, storage,
transportation and delivery scheduling.
■ Marketing and sales. Activities concerned with obtaining information about the
needs of customers and persuading them to buy, such as market research, personal
selling, advertising and promotion, pricing and negotiation.
■ Service. Activities associated with providing services to enhance or maintain the
value of the product, such as installation, repair, training, parts supply and prod-
uct adjustment.
Firm infrastructure
Human
resource Recruitment Recruitment
management Training Training
Information Market Service
Technology systems research manuals Ma
management development
Sales Procedures
r gin
Support activities
literature
Procurement Computer Spare parts
Advertising Subsistence
services
agency
Transport
Travel
Outbound Marketing and Service

logistics sales
• Order • Packaging • Delivery
processing • Pricing • Installation
• Warehousing • Promotion • Repair
• Inventory • Salesforce • Servicing
Ma
r gin
Inbound logistics
Operations
Figure 11.1
The value chain and
the marketing Primary activities Marketing channel activities
channel
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These three vital sources of both cost and competitive advantage can be undertaken
by the producer, independent intermediaries (such as wholesalers, agents or retailers)
or, more usually, a combination of the two. How management decides to configure
these activities is a fundamental strategic decision having a major impact on the
future of the business. The outcome should result from a management decision about
which activities should be regarded as the firm’s core competences. Which activities
does the firm need to do better than anyone else? Those activities not regarded as
core should be delegated to third parties that have specialised skills. There are a
number of reasons why intermediaries are often more efficient or effective than the
producer in undertaking some of these logistics, marketing and service tasks.
The superior efficiency of intermediaries arises from what theorists term the discrepancy of
assortment.2 Most producers make only one or a limited number of products. Customers,
on the other hand, desire a vast number of varied products and services. It would be
hopelessly inefficient for each producer to go to individual customers or vice versa.
Intermediaries sharply reduce the communications and transport resources required.
This is illustrated in Figure 11.2, which shows three producers – a farmer, a food
processor and a beverage manufacturer – marketing to 10 customers. If there is no
1
Farmer 2
3
4
Food 5
processor 6
7
8
Beverage 9
manufacturer
10
A No intermediaries: P x C = 3 x 10 = 30 contacts
1
Farmer 2
3
4
Food 5
Intermediary
processor 6
7
8
Beverage 9
manufacturer
10
Figure 11.2 B One intermediary: P + C = 3 + 10 = 13 contacts
Costs of direct
versus indirect Note: P = producers, C = customers
marketing channels
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intermediary, 30 separate contacts are required. However, if the three producers work
through a common intermediary, only 13 contacts are required. A zero-level channel
(or a direct-marketing channel) is where a manufacturer sells directly to the final cus-
tomer.3 Figure 11.2B, which contains one intermediary, is a one-level channel. A
two-level channel contains two intermediaries. For example, a manufacturer first sells
to a wholesaler, which in turn sells to retailers, which in turn sell to the final cus-
tomer. A three-level channel contains three intermediaries, and so on. The greater the
number of customers and the more specialised the manufacturers, then the greater
the potential efficiencies from introducing multiple channel levels.
Intermediaries may not only be able to do some logistics, marketing and service tasks
more cheaply than the manufacturer, but they may also be able to do them better.
The superior effectiveness of intermediaries arises from the discrepancy of quantity.
The logic of manufacturing differs from the logic of marketing and distribution.
Normally the manufacturer obtains economies of scale and experience by producing
standardised products in large quantities. However, customers often want to buy tai-
lored solutions in small, often highly variable quantities. Companies that define their
core skills as product development and manufacturing often struggle to match the
effectiveness of intermediaries organised to serve the needs of specific markets.
A manufacturer will often have to sell to a variety of different target market segments
to achieve scale economies in production. Generally, intermediaries that are dedi-
cated to serving specific markets will have superior knowledge of these customers.
They can add value to the manufacturer’s products by tailoring solutions to the spe-
cific needs of clients. In addition, the wholesaler, retailer or other intermediary will
often put together complementary products or services from other manufacturers to
obtain scale economies in distribution and marketing.
In summary, there are comparative advantages in specialisation. While manufacturers
may be able to afford to set up their own channels, they can often earn a higher
return by investing in their core business. Intermediaries are often more efficient and
effective in making products available and attractive to target markets.
However, while it may be rational to delegate certain activities to intermediaries, it
does not make sense to delegate logistics, marketing and service strategy to these out-
side organisations. The supplier is ultimately dependent on and responsible for the
success of its distribution and marketing activities. Management therefore has to
make the right decisions on the selection of channel members and is responsible for
motivating and evaluating them to perform well. Consequently, distribution deci-
sions should never be totally delegated to intermediaries, rather they should be
shared. For example, while a retailer or dealer may be responsible for selling the prod-
uct once a customer enters their premises, the manufacturer may well have the lead
responsibility in ‘pulling’ customers into the showroom through advertising and pro-
motion. While an intermediary may undertake the servicing of the product, the
manufacturer has to ensure that the intermediary’s personnel are trained and moti-
vated to do the job well. If management does not seek to control the strategic
decisions, then profit in the supply chain will flow disproportionately to those chan-
nel members that do.
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Designing distribution channels
Many managers lack the luxury of being able to design an optimal channel strategy.
Often they have inherited a salesforce or set of intermediaries that cannot be changed
easily or quickly. Some firms lack the resources to create the distribution system that
would optimise the potential of their product and have to make do with established
distributors. Sometimes there are no suitable channels available for the particular
product that the firm wishes to market. Consequently, the firm’s channel system usu-
ally evolves over time as its markets and opportunities change.
Choosing the right channel design requires management to define the business’s
objectives, its marketing strategy and the activities to be trusted to the channels, to
identify the basic channel options and to evaluate the alternatives.
Channel objectives
The choice of marketing channel will be affected by the sales and profit objectives of
the firm, the resources it has available and its positioning strategy. A business willing to
sacrifice short-term profit for the sake of ambitious long-term market share goals may
well find setting up its own salesforce more attractive than using a distributor. This is
illustrated in Figure 11.3. Selling direct involves establishing a high fixed cost opera-
tion. By contrast, selling through a distributor’s salesforce involves a minimal fixed cost
but a high variable cost element because of the discounts paid. For a company satisfied
with a small market share (below M), using a distributor is cheaper. Companies aiming
at a high share will find that the company salesforce is more efficient.
Marketing
costs (€)
Own salesforce
Sales distributor
Figure 11.3
Break-even between
using a distributor Level of sales (€) M
and own salesforce
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Selling direct normally requires a higher resource commitment. Thus the firm’s
resources will constrain the channel choice. Finally, the choice of channels will be
influenced by the firm’s positioning strategy. In particular, how intensive is the geo-
graphical coverage required? Three options can be distinguished:
■ Intensive distribution. For low-priced, convenience or impulse products, companies

will generally want to maximise the number of outlets carrying them. The more
places carrying the product, the more likely it is to be bought. The more intensive
the distribution required, the greater the efficiencies offered by intermediaries.
■ Exclusive distribution. For high-priced, luxury products, the manufacturer will often
limit distribution to a very small number of intermediaries. The intermediary nor-
mally gains better margins and the exclusive right to sell the product in a specific
area. The manufacturer hopes to achieve in return a greater sales effort, greater
control of pricing and selling practices, and a superior brand image.
■ Selective distribution. Manufacturers of speciality goods will often look for a com-
promise between intensive and selective distribution. Here the manufacturer aims
to have sufficient cover, but to restrict it sufficiently to be able to select motivated,
knowledgeable dealers.
Channel strategy
Two aspects of strategy should be central in selecting channels: the market segments
targeted by the supplier and the differential advantage the supplier seeks to exploit.
First, it is crucial to choose a channel that has experience and credibility in dealing
with the target markets that the supplier seeks to serve. The channel selected should
have the capability to understand the needs of target customers, and the sales person-
nel and distribution facilities to match their requirements properly.
Second, the channel must be capable of effectively presenting and supporting the
supplier’s differential advantage. For example, if the channel is handling a technical
product that offers the customer operational cost savings, the intermediary sales
people must be sufficiently expert to analyse the buyer’s value chain and to demon-
strate the product’s economic value to the customer. The more innovative the
product and the more complex the customer value chain, the greater the competence
required from the channel. In the 1970s the majority of televisions in the UK were
rented and the entire distribution system was geared to high street store chains spe-
cialising only in TV rental. Some TV manufacturers even owned their own retail
chains to increase control. The reason for this structure was that the cathode ray
tubes, which delivered the picture to the screen, were unreliable and expensive and
under the rental contract the set was quickly replaced when it failed. Sony developed
a television which used improved and much more reliable cathode ray tube technol-
ogy to the extent that it was able to offer a guarantee of five years against failure. It
was faced, however, with a distribution structure which was unwilling to stock what
was perceived to be such a threatening, competitive innovation. Sony was forced to
change the distribution rules and sell its brand through specialist hi-fi and depart-
ment stores. The improved reliability meant that renting was no longer advantageous
and the rental chains rapidly declined.
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Channel reliability
Besides capabilities, an assessment needs to be made of the motivation of the channel’s
management and personnel, the extent to which the channel can be controlled and
the risk attached to the relationship. The motivation of a channel member will be influ-
enced by the impact of the supplier’s product on its overall business. How much does
the intermediary expect its own bottom line to be enhanced by the effort it puts
behind the supplier? But motivation can also be increased by fostering a long-term rela-
tionship and the appropriate mix of incentives and rewards for performance.
The supplier will prefer a channel over which it can exert control. It will want to
influence the way in which the intermediary develops a strategy for the business and
how it promotes and presents the product to customers. The ability to exert control
will depend upon the relative power of the supplier and its ability to impose sanc-
tions for unsatisfactory performance.
Finally, commitment to a channel may involve risk. One risk is that the channel may
subsequently become a competitor on the basis of the knowledge it acquires from the
supplier. For example, major retailers often develop ‘own label’ versions after a manu-
facturer’s brand creates a sizeable market. Second is the risk of dominance. A supplier
can become so dependent upon a single channel that the latter is able to appropriate
the value added and erode the supplier’s margin. Last, the manufacturer may become
locked into a channel and unable to adapt to opportunities or threats from newly
emerging marketing channels. For example, IBM’s commitment to its own salesforce
and selected dealers allowed it to be leapfrogged by other PC companies that
exploited discount stores, mail order, the Internet and other newly emerging low-cost
channels. This led to IBM selling its PC business to Lenovo, a Chinese computer man-
ufacturer, for just under €2billion in 2005.
Box 11.2 FT
Distribution channels: the Internet now challenged
by bricks without clicks
The distribution of music has seen dramatic changes over the past five years. Specialised record retailers
such as Tower, HMV and Virgin have seen their market eroded by two newcomers. Firstly supermarkets
have become a powerful force in music retailing and in the UK Tesco is the market leader in sales of CDs.
Secondly music downloading via the internet has revolutionised consumption whether it be by pay-per-
listen sites such as I-tunes or file sharing systems such as OpenNap and Gnutella which provide peer to
peer access to an enormous library of media. Many commentators have predicted the end of music
distribution through retail outlets but the following example shows how unpredicted distribution channels
can rapidly emerge.
Alanis Morissette may be one of Canada’s most prized cultural exports, but that did not stop HMV from
pulling all of the artist’s music from shelves in its Canadian stores in June 2005.
The retailer sent the CDs back to the artist's record label in protest at preferential treatment being given to
another distribution channel. But it was not internet or mobile phone downloading services that irked HMV
Canada. While the threats to traditional music retailers are widely assumed to come from new media
technology, this spat involved potential competition from CD sales in Starbucks' coffee shops.
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With the industry adjusted to the concept of paid-for downloads, high street chains are steeling themselves
against new claims on their market share. Starbucks' emergence as a player in the retail arena is getting its
older rivals into a grande cappuccino-sized froth.
In March, the chain had announced a deal with Maverick Records, part of Warner Music, for Alanis
Morissette's Jagged Little Pill, an acoustic version of her 1995 breakthrough album. The pact was for a six-
week window of exclusivity for Starbucks to sell the album in its 4,400 stores in the US and 400 in Canada.
But it was only on June 13, the release date, that the controversy really took off. HMV Canada announced
that it was pulling all of the artist’s music from its shelves and sending it back to Maverick in protest at such
preferential treatment for Starbucks, ‘consistent with the views of the majority of our customers,’ according
to Humphrey Kadaner, president of the Canadian chain.
The same day, Ms Morissette appeared to add fuel to the fire by performing for a mere 120 company
employees and contest winners at a Starbucks store in New York. In an interview with Billboard, the US
trade publication, she pointed to the longstanding links between acoustic troubadours and such venues:
‘The acoustic songs have a coffee-house feel, so I think it fits.’
Ms Morissette also shrugged off the complaints of discontented retailers who will be unable to sell her new
record until August. ‘I’ve always been open to alternative ways of sharing my music,’ she said. ‘Any time
there is a paradigm shift like this, I understand that some people are going to be resistant. It happened with
the internet too.’
Ed Christman, retail editor of Billboard, can understand the collective retail sulking. ‘In [North America]
there are many retailers who felt they helped break Alanis Morissette the first time around,’ he says, ‘and
now they feel they are being shafted the second time around.’
In 2003, traditional music retailers in North America blacklisted the Rolling Stones' catalogue after the band
made an exclusive initial deal with Best Buy, the consumer electronics retailer, for its Four Flicks DVD. Elton
John also found himself removed from some retail racks last year when he did the same thing with Dream
Ticket, a new DVD.
In the UK, retailers were irked by EMI’s exploitation of a loophole when digital sales were integrated into the
singles chart in April. The company initially sold Gorillaz' Feel Good Inc online, releasing a token 300 copies
to stores to allow qualification for the chart.
Despite such incidents, Mr Christman believes news of the death of the old-fashioned music store is
contrived. ‘I don’t see any threat, as yet, coming from new technology to traditional retailers, apart from CD
burning,’ he says. ‘I think a lot of that originates in the press – they are the ones saying retail is over and
done with. The retailers believe they are going to be here forever.’
The future, says Mr Christman, is not about the obliteration of the old by the new, but about co-existence.
‘Retailers are downsizing their music selection and replacing it with other entertainment products. In future,
music will be consumed in many different forms, some people will be buying it through cellphones, some as
digital downloads, some will still be buying it as a physical entity.’
Steve Gallant, product director for HMV in the UK, says he can understand the reaction of the chain's
Canadian division over the Alanis Morissette issue. But he does not believe such a situation could arise in
the British industry, where ‘we all understand that we are part of the same business, and those new players,
while they have a presence in the UK, don't have the same influence as music retail’.
Starbucks’ Hear Music bars, where US consumers can burn their own compilations from a database of some
150,000 songs, is projected by American analysts to realise as much as $120m (£66m) a year, which would
represent only 3 per cent of the company's annual US sales of $4.5bn. But at the other end of the scale from
its courtship of a superstar, the chain's championing of one new US band has been an undeniable success.
▼
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Atlantic Records agreed a three-month window of exclusivity with Starbucks for Antigone Rising, the New
York-based folk-rock girl group, for its debut album From The Ground Up. The result, according to Brian
Corona, Atlantic director of adult promotion, is sales of 52,000 copies in five weeks – beyond the dreams of
an unheard-of act. ‘This has been phenomenal for us – it is a fantastic opportunity,’ he says. ‘If people are
actually buying music, however they are doing it, that is a positive thing.’
Source: Financial Times, 21 June 2005
Channel alternatives
Management can choose from among three generic marketing channels. Figure 11.4
summarises these alternatives:
■ Direct marketing. This involves selling to customers primarily through mass com-
munications media. It includes advertisements in newspapers and magazines, and
on radio and TV, telephone selling, the Internet, mail and catalogues. If the buyer
places an order (by phone, letter, or over the Internet), the seller sends the goods
by mail or delivery service.
■ Salesforce. This is selling through salespeople. A company might build its own
salesforce, utilise the services of another firm or hire an independent contract
sales team.
■ Intermediary marketing channel. This is a network of independent organisations
involved in the process of making a product or service available to the final cus-
tomer. A myriad of organisations undertake such activities. These can be classified
according to whether they buy and take title to the goods. Merchants are those
intermediaries that buy, take title to and resell the merchandise. Dealers, jobbers,
distributors, wholesalers and retailers are the main types of merchant. Agents
prospect for customers and may negotiate prices, terms and other conditions of
sale on behalf of the supplier, but they do not take title to the goods. Examples are
brokers, commission merchants, manufacturers’ agents and sales agencies. Finally,
facilitators are agencies that perform or assist in performing certain marketing and
Channel options
Direct marketing Salesforce Intermediary

• Internet • Own salesforce marketing
• Telephone • Another firm’s channel
• Mail • Contract force • Merchants
• Catalogue • Agents
Figure 11.4 • Facilitators
Three generic
marketing channels
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distribution functions, but which neither take title to the goods nor negotiate pur-
chases or sales. These include transport companies, independent warehouses,
insurance companies, advertising agencies, market research companies and banks.
Intermediary marketing channels can also be classified according to their degree of

integration and control. Conventional channels are loose networks of independent
merchants, agents or facilitators, each of which is competing to maximise its own
profits rather than the channel profits overall. Vertical marketing systems are inte-
grated networks of producers and channel intermediaries that are professionally
managed and controlled to maximise overall channel performance. These include co-
operatives, franchised operations and channel networks dominated by large
producers, wholesalers or major retail chains. The advantages and growth of vertical
marketing systems are discussed further below.
Evaluating channel options

Selecting the best channel alternative logically involves the following steps:
1 List the objectives, strategy and channel reliability attributes that form the criteria
for evaluating the alternatives.
2 Rate the importance that should be attached to each of these criteria.
3 List the channel alternatives being considered.
4 Score each of the alternatives along these criteria and identify the one with the
highest score.
This method is illustrated in Table 11.1. Here a particular form of vertical marketing
channel scores best. The benefits of such a methodology are not in the specific num-
bers, which are inevitably subject to the vagaries of managerial judgements about
weighting and scoring. Rather its use is, first, to encourage managers to specify the
Table 11.1
Channel options
Evaluating
alternative channel Importance Direct Franchise Conventional Vertical
options weight
Channel objectives
1 Goals 0.1 5 2 3 4
2 Resources 0.1 1 2 5 3
3 Positioning 0.1 1 4 2 5
Channel strategy
4 Target market 0.15 3 3 4 4
5 Differential advantage 0.2 4 4 1 5
Channel reliability
6 Motivation 0.24 5 4 2 4
7 Control 0.1 5 3 1 4
8 Risk 0.1 2 2 2 3
Weighted scores 1.0 39 35 26 45
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attributes they need from an effective channel. Second, it identifies the strengths and
weaknesses of the alternative chosen and highlights which problems in the chosen
channel still need to be addressed.
Managing distribution channels
The major issues in the management of channels are how to select individual organi-
sations, how to motivate them, how to evaluate and control them, and how to
manage the conflicts that inevitably arise among independent businesses.
Selecting intermediaries
After management has chosen a type of channel system, individual firms have to be
selected. Major suppliers with a record of success normally have little difficulty in
attracting intermediaries wanting to market and distribute their products. But small
companies will often have to market themselves professionally to attract interest
from the best dealers and retailers.
In targeting intermediaries, the criteria will be similar to choosing channels and the
selection scheme of Table 11.1 should be applicable. Management will need to assess
whether a specific intermediary would be able to further the supplier’s business objec-
tives, whether it has access to the right target markets, whether it can exploit the
supplier’s differential advantage, and whether it can be motivated, controlled and
relied upon.
Motivating intermediaries
If channel members are to market the supplier’s products efficiently and effectively,
they need to be motivated. It is useful to distinguish between promotional and part-
nership motivators. Promotional channel motivators are essentially short-term,
economic inducements to push the supplier’s products or services. The most obvious
of these is the margin that the manufacturer gives to the intermediary for its services.
Normal trade discounts can be supplemented by quantity discounts, promotional
discounts and cash discounts to further incentivise dealer effort. Negative sanctions
can also be used to induce behaviour that the manufacturer considers appropriate.
Such sanctions can include threats to terminate supply or to reduce margins. The
limitations of promotional motivators are that they are very expensive, they do not
build loyalty and they can be exploited by short-term-oriented dealers.
Partnership motivators seek to build a long-term community of interest between the
supplier and other channel members. Such a scheme may start with a joint taskforce
to analyse what is needed to create a competitive advantage in the market. Activities
are then assigned and integrated among channel members in a way that maximises
their effectiveness. Incentives and rewards are then developed that meet the criteria
of fairness and instrumentality. Such a system will include not only financial terms,
but also agreement on channel goals, strategy, training requirements and targeted
investments to develop the business partnership.
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Managing distribution channels
Controlling intermediaries
The producer should be able to control or at least significantly influence channel
members to act in a way that is instrumental to its interests. Control depends upon
defining agreed performance targets. These should include sales quotas and levels of
service for such items as inventory, customer delivery time, support, promotion and
training programmes. Performance has then to be periodically compared against
these targets, deviations highlighted and action taken.
To exert effective control, the producer must build up channel power – defined as the
ability to influence the activities of other channel members. Social scientists suggest
that the ability to control or lead a channel derives from both economic and non-
economic sources of power.
Figure 11.5 shows that the two economic sources of power rest upon the producer
creating resources (e.g. products, financing) desired by other members and also upon
the relative size of the firm. The non-economic sources of power are rewards, expert-
ise, reference, legitimate and coercive power. A company gains reward power by
offering attractive financial benefits. Expert power occurs when other channel mem-
bers see the producer as having special knowledge to enhance channel performance.
Referent power exists when other members admire or identify with the producer.
Legitimate power emerges when other channels recognise that they are subordinate
to the producer. Coercive power is a function of the producer’s ability to discipline
other members of the channel. Besides the level of power, control is influenced by
the dependency of or alternatives open to other channel members, and the desire of
the producer to control the channel.
Managing channel conflict

Channels should be designed and managed to elicit a partnership between members.
In practice, however, conflicts and disagreements are bound to occur among inde-
pendently owned businesses. To a certain extent conflict is positive in that it
encourages management to question the status quo and to consider changes in the
system. But conflict that gets out of hand can quickly erode the support of channel
members and affect the competitiveness of the business.
Three types of channel conflict can be distinguished. The most common is vertical
channel conflict between different levels within the same channel. Manufacturers of
grocery brands, for example, are often disgruntled about the terms and conditions
demanded by the powerful supermarket chains that purchase their brands. Horizontal
channel conflict occurs between firms at the same level of a channel. For example,
some smaller Toyota car dealers in Europe complained that larger dealers were getting
better terms and access to superior models. Multichannel conflict occurs where a sup-
plier has created two or more separate channels to serve a market. For example, IBM’s
independent dealers resented the company selling directly to some customers. The
growth of the Internet as a new low-cost channel has significantly increased this type
of conflict.
How channel conflict starts is easy to understand. There are five common sources.
The first is an inevitable conflict of interest. For example, a manufacturer wants a
dealer to devote primary attention to its brand, but the dealer may have a portfolio of
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Control of
resources
Economic
sources of
power
Size of firm
Level of power
Reward
power
Dependency of
other channel Channel
members leadership
Expert
power
Willingness
to lead
Non-economic
Referent
sources of
power
power
Legitimate
power
Coercive
power
Figure 11.5
Source: Adapted from Ronald D. Michman and Stanley D. Sibley, Marketing Channels and Strategy, 2nd edn
Determinants of (Columbus, OH: Publishing Horizons, 1980), p. 143
channel control
products, some from other manufacturers that may offer it higher profit or growth
potential. Second, conflict arises over the allocation of resources: for instance, over
how the profit margin should be split between manufacturer and retailer. Third, con-
flicts are created by the use of coercive power. If one party attempts to threaten the
other, resentment and distrust often cause lasting problems. Fourth, poor perform-
ance causes difficulties. Failure to meet promises or obligations fuels dissatisfaction.
Finally, personality conflicts between managers in the different channels can disrupt
the effectiveness of channel relationships.
When conflict arises, various mechanisms can be used to recreate effective relation-
ships.4 One is for the members of the channel to work together to develop a set of
superordinate goals that all agree would be mutually beneficial. The hope is that an
agreement on these ultimate ends would diminish the damage caused by narrow self-
seeking on the part of members. A second mechanism is the use of channel diplomacy
– personnel are appointed to act as diplomats, mediators or arbitrators, to bring
together the warring parties and settle disputes.
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Channel evolution
A third approach is the exchange of personnel between channel members to build up

an understanding of each other’s point of view. For example, McDonald’s has all its
suppliers send managers to work for one week in one of its restaurants. Another
device is co-option, where the producer seeks to win support by including managers
from other channels on advisory councils, boards of directors and so on. The objec-
tive is to create greater understanding, and shared goals and interests. Joint
membership of trade associations is yet another conflict resolution mechanism with
obvious co-operative goals.
Given the probability of at least some conflict arising in any channel arrangements,
management would be wise to establish in advance an agreed forum and set of proce-
dures for resolving such problems.
Channel evolution
Any channel design will become obsolete if it does not change. Two sets of factors
erode the effectiveness of existing channels. First, changes in the market-place.
Evolving customer needs, market growth, the increasing reliability of products and
new competition all change channel requirements. Second, increasing knowledge,
technical progress and innovation create new and better ways of delivering value to
customers. Such companies as Benetton in clothing, Dell in personal computers,
Direct Line in insurance and First Direct in banking owed their rapid growth to inno-
vations that they made which introduced faster, lower-cost marketing channels.
If management does not anticipate or react to change, it will get locked into high-cost,
ineffective channels. Changing channels, however, is not easy and invariably creates
conflict with current intermediaries. To prepare themselves for these challenges, man-
agement needs to keep under continual review the strategic fit of the channel system
and have in place plans and timetables to get closer to the changing ideal.
Four changes in channels are particularly apparent today – the development of low-
cost channels, and the growth of vertical, horizontal and multichannel systems.
Growth of low-cost channels

As a market evolves, the value added by a channel tends to decline, creating opportu-
nities for new, low-cost distribution. This is illustrated in Figure 11.6. When an
innovatory product or concept (e.g. the PC, designer-label clothes) is first introduced,
management needs high-value-adding channels. Intermediaries provide high-level
support in helping manufacturers find customers, educating buyers and supporting
them with advice and service. Later, as the market grows, customers become more
familiar with the product, prices decline and product reliability improves. This leads
to a shift from specialist to higher-volume, lower-value-adding channels. As the
market moves to maturity, growth slows and competitive pressures erode margins fur-
ther, encouraging companies to look for lower-cost, mass-merchandising channels.
Finally, the product becomes a commodity and even lower-cost channels emerge (e.g.
mail order, discount shops).
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Growth Maturity
PCs: computer shops PCs: department stores

High
Designer clothes: Designer clothes:
department stores Marks & Spencer,
Market Debenhams
growth
rate Introduction Decline
Low PCs: hobbyist shops PCs: mail order, Internet
Designer clothes: Designer clothes:

boutiques discount stores
High Low
Figure 11.6 Value added by channel
The evolution of
channels in a Source: Adapted from Miland M. Lee, 'Change channels during your product's life cycle', Business Marketing,
December 1986, p. 47
market
An analogous pattern of development in retailing is termed the wheel-of-retailing

hypothesis.5 Looking at the historical evolution of retailing, it was observed that
established retailers tended to offer many services to customers (e.g. wide assortment,
convenient location, pleasant atmosphere to shop in) and had to price high enough
to cover these costs. This provided the opportunity for entrepreneurs to create new
types of shop with fewer services, lower operating costs and hence lower prices. Over
time the pattern repeated itself. As the discounters grow at the expense of the con-
ventional stores, they in turn tend to upgrade their facilities, add services and move
into more expensive sites, forcing them to raise prices. This then stimulates a new
entrepreneurial phase as another round of low-cost innovators enter.
While the wheel-of-retailing hypothesis is too simple to explain the heterogeneous
segmentation and positioning strategies employed by today’s retailers, it does provide
insights into the evolution and difficulties faced by today’s department stores and
major food retailers as they come under attack from new discount operators.
Growth of vertical marketing systems

In the past, marketing channels consisted of independent organisations, each pursu-
ing its own individual goals. As illustrated in Figure 11.7, in this type of conventional
marketing channel the member firms sought to optimise their own buying and selling
policies, often at the expense of those above or below them in the channel. In recent
years, such channels have been replaced by vertical marketing systems in which chan-
nel activities are managed and integrated by one member of the channel – either the
manufacturer, an intermediary or a retailer.
Vertical marketing systems have three advantages over conventional marketing chan-
nels. First, they reduce channel costs by avoiding replication of functions. Second, they
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Channel evolution
A conventional marketing channel A vertical marketing system
Members Functions Members Functions

Design
Make
Brand Manufacturer
Manufacturer
Price
Promote
Sell
Design
Make
Brand
Buy Price
Stock Promote
Promote Buy
Wholesaler Stock
Display Wholesaler
Sell Display
Deliver Sell
Finance Deliver
Finance
Buy
Stock
Promote
Retailer
Display
Retailer
Sell
Deliver
Finance
Consumer Consumer
Figure 11.7
Conventional and
Source: Adapted from David J. Kollat, Royer D. Blackwell and James F. Robeson, Strategic Marketing, 3rd edn (New
vertical marketing York: Holt, Rinehart & Winston, 1997), p. 321
channels compared
minimise conflict among channel members by laying out clear goals and programmes.
Third, they maximise the experience and expertise of channel members. Not surpris-
ingly, go-ahead managers are seeking to create such vertical systems. There are three
types of vertical marketing system – corporate, administered and contractual.
A corporate vertical marketing system exists where successive stages of the channel are
under a single ownership. For example, TNT owns and controls the delivery and col-
lection vehicles, the distribution centres and the aircraft which are necessary to
ensure reliable and fast parcel delivery. Before the Second World War, such vertically
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integrated systems were common. But today most businesses cannot afford, or do not
wish, to invest in fixed assets and skills where they lack clear competitive advantage.
Instead they build administered vertical marketing systems. Here, channel participants
maintain their financial independence and legal autonomy, but are effectively con-
trolled and led by the most powerful member of the channel. Dominant retailers
such as Hennes & Mauritz and Ikea provide such leadership in co-ordinating and
integrating the product development, manufacturing, purchasing and sales activities
of the suppliers making up their channel. Strong manufacturers such as Mercedes,
Shell and Pfizer can also dominate their channel systems.
Contractual vertical marketing systems are inter-organisational relationships formalised
through contracts. Channel members’ rights and obligations are defined by legal agree-
ments. The two most frequent types of contractual system are collaborative and
franchise arrangements. Under collaborative agreements, separate organisations share
resources and often agree to joint purchasing arrangements. The most common form
are co-operatives. These can be led by producers (e.g. farmers), wholesalers or independ-
ent retailers banding together. All three types of co-operative are common in Europe.
Franchise arrangements are the other type of contractual system. Here a seller (the
franchiser), gives an intermediary (the franchisee), specific services and rights to
market the seller’s product or service. In return, the intermediary agrees to follow cer-
tain procedures and not to buy from others or sell competing products or services.
The strong integration has made franchising a rapidly growing form of channel in
Europe. In the United States it now accounts for one-third of all retail sales. Also, the
failure rate for franchisees is only a fraction of that for new businesses generally.
Growth of horizontal marketing systems

Another rapidly growing channel development has been the readiness of two or more
autonomous organisations at the same level in a channel to co-operate in exploiting
marketing opportunities. Even companies that are normally competitive increasingly
explore such co-operation.
Four reasons account for the growth of horizontal marketing systems. First, co-
operation reduces the risk that an individual firm has to incur. Second, access to
another company’s marketing channel can accelerate the speed with which a com-
pany can penetrate a new market and pre-empt competition. Third, co-operation can
give a company access to new technologies and knowledge.
Co-operation can exist at many levels. Philips and Du Pont co-operated in the devel-
opment of compact discs; Toyota and General Motors collaborated in the assembly of
cars; Aventis Pharmaceuticals sells Procter & Gamble’s anti-osteoporosis drug Actonel
in many countries. Through horizontal collaboration a partner gains access to addi-
tional distribution channels, salesforces and outlets.
Growth of multichannel marketing systems

In the past, many firms sold to a single market through a single channel of distribution.
Today, however, most markets have become highly fragmented. Different customers
have different product and service needs and have different price sensitivities. As a
result, different channels emerge to meet the expectations of these segments.
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Organising distribution
For example, a computer company such as Hewlett-Packard sells PCs through its own
salesforce, but it also uses the Internet, computer stores, direct marketing techniques
and value-added resellers. ICI Paints sells directly as well as through supermarkets
and merchants.
The advantage of a multichannel marketing system is that it enables the firm to serve
a range of market segments effectively. However, such systems invariably create chan-
nel conflicts. These arise because an intermediary will usually face additional
competitors and because different intermediaries normally obtain different terms
from the supplier. As a result, the supplier developing a multichannel system needs to
anticipate carefully the areas of strain and to communicate channel programmes that
are perceived as fair among channel members.
Once management has decided on the marketing channels, the next step is to design
and operate a physical distribution system that will deliver products and services to
customers efficiently and effectively. This is a complex problem because management
has to reconcile two quite conflicting objectives. First, distribution costs need to be
kept low. Typically, distribution costs (transportation, inventory, warehousing, order
processing, etc.) account for up to 20 per cent of sales. Since trading profits often
account for only 5 per cent, there is obviously a major incentive for managers to cut
distribution costs. On the other hand, distribution is a major source of competitive
advantage. Companies that can offer immediate availability and fast service can get
better prices and win new customers. The task of management is to achieve effective
customer service without excessive expenditure on distribution.
This trade-off is illustrated in Figure 11.8. Higher levels of customer service are associ-
ated with higher costs of transportation, order processing and inventories.
Management has to estimate how much customer orders will increase with better
service and how many out-of-stock conditions will be avoided.
In the past, management has focused on physical distribution primarily as a cost. A
production-oriented viewpoint has dominated thinking. The objective has been
Total costs
Cost (€)
Transportation,
order-processing
and inventory-
carrying costs
Cost of lost sales

Figure 11.8
0 100%
Relationship
between service Level of customer service
levels and costs
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finding low-cost solutions to get the product to the customer. Today, modern man-
agers prefer the concept of marketing logistics to physical distribution thinking.
Marketing logistics starts by asking how customers want to receive the product and
then working backwards to the design of materials, final goods, inventory schedul-
ing, transportation, warehousing and customer services to meet these wants.
Customer service
In developing a logistics strategy, management should start with identifying what
customers want and then estimate the benefits and costs of meeting these wants.
The needs that an effective distribution system can meet are the following:
■ Availability. Ideally, a company should be able to meet all customer orders from its
stock of finished goods. If it has run out of stock, the customers are likely to go
elsewhere. However, guaranteeing a 100 per cent in-stock position would normally
be prohibitively expensive in carrying costs.
■ Speed of delivery. Customers like rapid delivery and some will pay a substantial
premium to obtain it. Delivery can be speeded up by fast order processing and
rapid transportation.
■ Reliability. Customers want dependability – they want to know when they are
going to receive the merchandise. They might not care whether it takes seven or
eight days as long as they are guaranteed that it will be there in ten days.
■ Lot size. The lot size is the number of units that customers are permitted to buy on
a single purchasing occasion. The smaller the lot size, the greater the distribution
cost that the channel incurs.
■ Product variety. The greater the breadth of assortment carried, the more choice the
consumer receives.
■ Convenience. The more outlets the channel has, the more convenient it is for the
customer to purchase.
■ Service and support. The distribution system can increase customers’ satisfaction by
understanding their requirements, supplying financial support, installation, main-
tenance, etc.
Many managers, both in old- and new-economy business, have underestimated the
value of good customer service and the costs of not providing it. Many orders were
lost because of slow delivery, unreliability, lack of availability and poor service. Given
the increasing lack of product differentiation between major manufacturers, service
has become a key differentiator.
The steps in developing a distribution system that balances the benefits and costs are
as follows:
1 Identify the dimensions of service that customers value. Market research is required
to find out what aspects are important. The answers are likely to vary by segment.
Some customers will prioritise speed, availability and service; others will rate price
as more important.
2 Weight the service dimensions by importance. Again the weights need to be
provided by samples of customers to obtain objective data.
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3 Obtain ratings of the business and its competitors along these dimensions. This will
allow management to compare the strengths and weaknesses of its customer serv-
ice offer.
4 Estimate the revenue effect of changes in service levels. Management can provide
judgements based upon the information obtained from customers and the per-
formance of competitors with different service levels.
5 Estimate the costs of providing different levels of service. Management will need to
judge the impact on transportation, inventory and warehousing costs of different
service levels. Putting the revenue and cost projections together will identify the
service level that maximises profit contribution.
This method is illustrated in Figure 11.9. Here a manufacturer estimated that an in-
stock level of service of 93 per cent was more profitable than the 99 per cent it was
currently offering. In this case the costs of the extra safety stock to meet a 99 per cent
service level exceeded the revenue gain from better service. The resulting savings in
such situations can often be very substantial.
Several qualifications, however, need to be added to such analyses. First, the method
should be applied on a segmented basis. Different types of customer have different
expectations about service. Some market segments are willing to pay high prices to
obtain premium service; others give priority to low prices and are willing to accept
minimum service levels. The company has to decide which market segment it is
appealing to and develop the appropriate price–service balance. This is illustrated in
Figure 11.10. Companies can offer either high or low service levels as long as they are
offering price combinations that place them to the left of the diagonal. If they fall to
the right, either the price is too high or the service-level combination is too low to
offer value to any market segment.
A second qualification with all profit maximisation models is distinguishing short-
term from long-term profits. While cutting service levels (as in Figure 11.9) almost
invariably increases short-term profits, its negative long-term impact on the com-
pany’s image and competitive positioning should not be underestimated. Finally,
price–service equilibria are always temporary. Continual developments in flexible
manufacturing, just-in-time management and innovations in logistics act to reduce
Revenue from
service
Increase in costs,
sales or profit (€)
Maximum
profit
contribution
Distribution
costs
Profit
curve
93 99
In-stock level (%)
Figure 11.9
Source: Adapted from Business Logistics Management by Ballou © 1985. Reprinted by permission of Pearson
Setting customer Education Inc., Upper Saddle River, NJ
service levels
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High
High-value distribution
High-service
distributors
Customer
service
level Low-cost distributors
Low-value distribution
Low
Figure 11.10 Low High

Service positioning Price to the customer
map
the costs of high service levels. Companies that ‘satisfice’ on service tend to be gradu-
ally overtaken by more dynamic operators raising the competitive benchmarks.
Once the company has determined its target service levels, it then needs to design
the physical distribution system that can deliver it at minimum cost. To achieve this,
the major issues for management’s attention should be as follows:
■ How can communications and order processing be speeded up?
■ Where should goods be produced and stocks held?
■ How much stock should be held?
■ How can transportation be handled more efficiently?
Communications and order processing

The physical distribution process starts with the company receiving an order. Copies
of this order are then routed to the various departments responsible for inventories,
purchasing, credit control, manufacturing, dispatch, warehousing, shipping and
invoicing. If these activities are speeded up, the company can service customers
better and take out costs from its own operation.
Modern computing systems offer major opportunities for companies to reduce over-
head costs and delays. Salespeople can send in orders to the relevant departments
immediately with today’s networking technology. In addition to booking orders,
systems can give sales people instant status reports on the creditworthiness of customers,
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the status of past orders, inventory levels and recommended alternatives for out-of-stock
items. Once the order is booked, modern systems can automatically generate orders to
ship, billing of customers, updating of stock records, the scheduling of purchasing and
production for new stock and the issue of customer delivery confirmations.
The re-engineering of order processing and internal communications is offering com-
panies major sources of competitive advantage and cost savings.
Production and warehouse location decisions

If the company is to meet orders speedily, it needs to have produced the goods and
have stock available. As Figure 11.11 illustrates, a key determinant of such availability
is the choice of the number and location of production facilities and warehouses. In
making decisions about numbers, there is the usual dilemma. More locations offer
the potential of increased customer service in terms of rapid delivery. On the other
hand, more facilities increase costs and capital employed, acting to reduce profit
Products
Customer
Factory
Storage
warehouse
Customer
Customer
Storage
Factory warehouse
Customer
Figure 11.11 Information

Product and
warehouse location
decisions
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margins and return on capital. Consequently, the number of warehouses and facili-
ties must strike a balance between customer service levels and distribution costs.
Deciding on the right number of facilities and their location is complex because of
the enormous number of possible facility combinations and sites, particularly when
one is looking at the European or global market-place. Increasingly, such decisions
are assisted by computer-based mathematical models.6 These programming models
centre around choosing locations and numbers that minimise total distribution costs,
subject to the supply and demand constraints facing the business.
While these models can help managers to optimise steady-state distribution prob-
lems, they cannot easily reflect the changing strategic opportunities created by new
knowledge. For example, the new trend towards ‘flexible’ manufacturing is reducing
the number of both factories and warehouses required to achieve given service levels.
In the past, companies built ‘focused’ factories geared to achieving economies of scale
by producing large volumes of a narrow range of products. Today’s ‘flexible’ factories
work in the opposite way, by radically reducing the costs of variety. This means fewer
factories and fewer warehouses to carry inventory.
The capital employed in factories and warehouses can also be reduced in other ways.
Joint ventures can lead to co-production agreements whereby the company utilises a
partner’s facilities. Co-marketing deals can also lead to the sharing of warehouse facili-
ties. Finally, new swifter forms of transportation can reduce the number of production
and storage facilities required. Overnight delivery services now permit customers to be
serviced throughout Europe with minimum storage facilities in the field.
Inventory management and control

Inventory control is a key decision area in managing distribution. Ideally a company
should have enough stock to meet customers’ orders immediately. If merchandise is
not available, the sale may be lost and a dissatisfied customer goes to a competitor –
perhaps permanently. On the other hand, the costs of carrying stock (interest, ware-
housing, insurance, deterioration) can be exceptionally high and can seriously erode
profits. For most companies, meeting the needs of all customers immediately from
stock is financially non-viable. Thus the goal of inventory management is to find the
right balance between customer service and the cost of carrying additional stock.
Inventory control centres around two related decisions: how much to order and when
to reorder. Deciding how much to order requires balancing the cost of carrying inven-
tory against the cost of lost sales. Large orders reduce the chances of being out of stock,
but increase the size of the inventory. For example, if annual demand is 1,000 units and
500 are reordered at a time, then the average inventory is 250 and there are two
chances of becoming out of stock. However, if the item is reordered in lots of 100,
average inventory is 50 but there are ten chances of running out each year.
One way to calculate the right balance is by using the economic order quantity
(EOQ) formula.7
EOQ = 2SY
––––
IC
where S = annual sales in units, Y = procurement cost per order, C = the cost of each
unit and I = carrying costs as a percentage of cost. For example, suppose an item sells
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1,200 per year and that procurement and the cost of lost sales due to stock-outs are
€375 per order. If carrying costs are 25 per cent and the item costs €6, then the eco-
nomic order quantity would be 346. It is easy to see from the formula that as carrying
costs rise and profit margins fall, the EOQ comes down.
This formula works well when stocks can be replenished instantly. In most situations,
however, this assumption does not hold and a modified approach is required to
decide when to order and how much. A more general method is to measure the lead
time and forecast the demand that will occur during this period. Suppose manage-
ment decide that they need to target a 98 per cent in-stock position to be
competitive. Using the normal distribution, a 2 per cent out-of-stock probability
represents a 2.05 standard deviation of demand. Assuming the standard deviation of
demand during the lead time period is 20, an extra safety stock of 20 × 2.05 or 41
units is required (Figure 11.12).
The initial physical inventory of 387 in Figure 11.12 is made up of the economic
order quantity (Q1) of 346 plus a safety stock of 41. The reorder point is obtained
from adding the safety stock to average demand during the lead time. In this case,
weekly sales average 23 units (1,200/52) and the lead time is four weeks. Lead-time
demand is therefore estimated as 92 units (4 × 23). Consequently, the reorder point is
Units
Maximum order and inventory level

479
387
Inventory level
Q2
Q1
R1
133
41
Safety stock
0 Time
LT Stock-out
Q = Order quantity
R = Reorder point
Figure 11.12 LT = Lead time
Impact of demand
variation on order Source: Adapted from Douglas J. Dalrymple and Leonard J. Parsons, Marketing Management, 6th edn (New York:
Wiley, 2000), p. 581
quantity
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133 (41 + 92), and new orders are placed when inventories fall below this level.
During the first reorder cycle, additional demand takes stocks substantially below the
reorder point so that the reorder quantity (Q2) exceeds the EOQ to bring the safety
stock back up to 41 units. In the second cycle, unexpectedly high demand leads to a
stock-out despite the safety stock. If delivery time tends to vary widely, then extra
safety stock is needed to control stock-outs.
In recent years there has been enormous interest in just-in-time approaches to inven-
tory control. Just-in-time consists of arranging supplies to come into the factory,
warehouse or retail store at the rate they are needed. If suppliers are dependable, the
lead time for reordering is minimised, allowing dramatic cuts in the level of inven-
tory required to achieve desired customer service levels. Just-in-time is easier to
implement in production situations where usage rates are relatively stable and suppli-
ers can locate near the factory. It is harder in distribution networks, where customer
demand varies widely and buyers are often a long distance from the production cen-
tres. Nevertheless, many top distributors and retailers are already seeing major gains
from exploiting just-in-time techniques.
Transportation management
Transportation is the largest cost element in physical distribution. The choice of
transportation mode affects the level of inventories that need to be held, the cost of
the product and the service provided for customers in terms of on-time delivery and
the condition of the products when they arrive.
In choosing the method of transportation, management will need to identify the
options available and to specify the criteria for choice. The options may be road, rail,
air, shipping and sometimes pipeline. The criteria will include speed, service, fre-
quency, reliability, cost, availability and flexibility. Table 11.2 presents a simplified
example of how decisions should be made.
In practice, companies are likely to combine two or more methods for transporting
goods to their warehouses, dealers or customers. Also the solution is likely to change
over time as transportation costs change. In recent years there has been an increasing
trend towards companies subcontracting the whole transportation operation to out-
side operators. More manufacturers, wholesalers and retailers are recognising that
transportation is not an area of core competence and are electing to have it done by
specialists who can achieve more efficiency and effectiveness.
Table 11.2
Criteria Importance Rail Road Air Shipping Pipeline
Comparison of weight
transport modes
Speed 0.15 3 4 5 2 1
Service frequency 0.2 4 5 3 2 5
Reliability 0.15 3 4 3 2 4
Cost 0.15 2 2 1 3 5
Availability 0.25 3 5 2 2 1
Flexibility 0.1 3 5 2 2 1
Weighted scores 1.0 3.1 4.3 2.6 2.2 2.8
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Questions
One striking example is the distribution of petrol, where the major suppliers may
agree to supply each others’ filling stations if they do not have a refinery or storage
facility at an economically viable distance from the retail outlet their competitor is
able to supply more cheaply and effectively. These arrangements need to be reciprocal.
Summary
The choice of marketing channel is a key strategic decision. It is a major determinant of
cost, since marketing channels can easily absorb 50 per cent of the price that the final
customer pays. It can also be a central determinant of the firm’s marketing performance,
since important marketing activities are normally delegated to intermediaries. The
effectiveness of these intermediaries determines the customer service level and hence
the ability of the firm to win and hold customers.
Intermediaries can often perform distribution and other marketing tasks more effectively
and efficiently than suppliers that lack core competences in these areas. But suppliers
can never delegate responsibility for strategy to these intermediaries. Management has to
have a strategic plan of how to get the best out of the marketing channels. This means
making the right initial channel selection, managing the channel members and assessing
how the marketing channel needs to evolve with the changing environments in which the
firm operates.
Questions
1 A new company is set up to manufacture men’s shirts. What factors should govern its
choice of channel strategy?
2 Marxist writers regard merchants as profiteers who exploit both producers and consumers.
Why are they wrong?
3 What criteria should determine the choice of marketing channel?
4 Why does conflict often arise between the manufacturer and its distributors? How should
conflict be handled and controlled?
5 A producer of a new industrial product wants to create a strong vertical marketing channel
for its innovation. How can this be done and what advantages would it obtain?
6 Outline the goals and major aspects of an audit of a company’s marketing logistics system.
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Notes
1. Michael E. Porter, Competitive Advantage (New York: Free Press, 1985), pp. 33–61.
2. See Bert Rosenbloom, Marketing Channels: A management view, 5th edn (Hinsdale, IL: Dryden,
1995).
3. Philip Kotler, Marketing Management, 10th edn (Englewood Cliffs, NJ: Prentice Hall, 2000),
pp. 530–31.
4. The following section draws on Louis W. Stern and Adel I. El-Ansary, Marketing Channels, 3rd
edn (Englewood Cliffs, NJ: Prentice Hall, 1996).
5. Stanley C. Hollander, ‘The wheel of retailing’, Journal of Marketing, July 1960, pp. 37–42.
6. See, for example, Richard B. Chase, Production and Operations Management (Homewood, IL:
Irwin, 1999).
7. The following example is adapted from Douglas J. Dalrymple and Leonard J. Parsons,
Marketing Management, 6th edn (New York: Wiley, 1996), pp. 579–80.
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‘Your customers are only satisfied

because their expectations are so low
and no one else is doing better.’
Ken Blanchard, author and consultant
Chapter 12 MARKETING IN SERVICE BUSINESSES
This chapter looks at how to get the best out of service businesses. There are three
reasons why services deserve a special chapter. The first is the sheer size and growth of
the service sector in the modern economy. In the major European countries, the USA and
Japan, more people are employed in the service sector than in all other sectors of the
economy put together. In these countries, the public and private service sectors account
for between 60 and over 70 per cent of national output. Services are also the fastest-
growing part of international trade, accounting for 20 per cent of total world exports.
Even these figures underestimate the true importance of services to both output and jobs,
since many activities in manufacturing firms are really services. On average, half the input
costs of manufacturers are now bought-in services (e.g. advertising, transportation, health
care, financial services). Also more people in manufacturing firms are employed in service
jobs such as design, marketing, finance and after-sales services than are employed in
making things. Managing such internal services shares many of the same problems as
service businesses.
Second, managing services raises special issues. These arise from the specific
characteristics of most services: the intangibility of the offering, the inseparability of
production and consumption, the difficulty of achieving standardisation and the
perishable nature of the services. Such features prioritise three managerial concerns not
normally centre-stage in ‘marketing’. These are quality control problems, concern with
the productivity of the operations and the management of human resources.
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Chapter 12 Marketing in service businesses
Finally, it is in some of today’s service companies that one sees the new models of
successful management practice. In the past, the computer industry provided the
success models, and before that the car industry, but today it is the service firms that
are providing most of the economic growth and new jobs.
The service sector covers a varied range of industries. The government provides a major
array of services in most countries. These include education, health, legal, military,
social, transportation and information services. Private sector services include profit-
oriented businesses such as banks, insurance companies, airlines, management
consulting organisations, solicitors, architects and advertising agencies. The private
sector also includes non-profit organisations involved in providing charity, artistic, leisure,
church and education services.
Some services are geared to individual consumers and households; others are oriented
to satisfying the needs of businesses and other organisations. Both consumer and
industrial services have been growing rapidly. In an affluent society, services tend to
provide higher marginal utility for consumers than goods. The marginal utility of products
tends to fall as incomes rise. The additional satisfaction provided by more food or more
consumer durables tends to diminish. In contrast, services have no such ceiling. Greater
affluence increases the desire of individuals to contract out mundane activities such as
cleaning, gardening or preparing meals. Also, rising incomes both generate a demand for
services that creatively consume leisure time (e.g. arts, sports, holidays) and provide the
resources to pay for them. Services can provide self-fulfilling experiences; goods only
provide ownership. Increasingly sophisticated technologies in the home also generate a
need to buy in specialist services to install and maintain them. Finally, politics – electoral
competition between parties seeking office – leads to promises of more and better
services. Education, health care and policing are services that win votes.
Spending on business and industrial services has increased even faster than spending on
consumer services. One reason is the increasing complexity of markets and
technologies. Companies need to buy in the services of knowledge organisations such as
management consultants and market research agencies to advise them on the
alternatives. Second, companies now want to focus on their distinctive competences and
buy in activities that they consider non-core. This has led to the growth of specialist
transportation, warehousing, sales, advertising and other business service organisations.
Finally, the increasing turbulence and unpredictability of today’s marketing environment
has encouraged firms to cut fixed overheads dramatically. If services are bought in, they
become variable costs and hence help dampen the impact of sales downturns.
This chapter first examines the nature and special characteristics of service businesses.
It then looks at the implications of these characteristics for management generally and
marketing in particular. In the final sections, the special features of non-business
institutions are examined, and how managers can improve their efficiency and
effectiveness.
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Nature of services
Nature of services
Services are not easy to define or classify. The essential characteristic of services is
their intangibility. A service is an act or benefit that does not result in the customer
owning anything. This definition expresses the central idea, but it is limited in that it
does not sufficiently distinguish between the marketing of goods and services. Goods
also supply intangible benefits. After all, the essence of the marketing concept is that
customers do not want goods for their own sake, but for the benefits they provide.
Recall Charles Revson’s famous comment on the business of Revlon: ‘In the factory
we make cosmetics. In the store we sell hope.’ Second, most manufacturers also
supply bundles of services (e.g. delivery, repair and maintenance, insurance, advice,
training) alongside their goods. Indeed, most service companies also supply goods
alongside their core service. An airline, for example, alongside its core service of
transportation, can also provide food, drinks, newspapers and magazines, entertain-
ment or a bed in which to sleep.
Mobile telecommunications are rapidly developing from a service providing two-way
speech communication to a multiple offering providing information and leisure
activities such as gaming and music on an interactive basis. While the established
giants such as Vodafone are trying to develop new services, the Japanese company
NTT has been active since the 1997 with its DoCoMo service and now claims over
30 million subscribers to its 3G service.
Consequently, there is rarely such a thing as a pure good or pure service. Most offers are
a combination of tangible and intangible elements. As Professor Theodore Levitt put it:
‘There are no such things as service industries. There are only industries whose service
components are greater or less than those of other industries. Everybody is in service.’
This is illustrated in Figure 12.1.1 For some offers the tangible or intangible element is
overwhelmingly dominant, but for others the customer is offered a combination of
products that can be physically possessed, plus ephemeral experiences and benefits.
In fact, by creatively changing this balance, managers can develop new offers or
appeal to new market segments. For example, Castrol has traditionally sold a
machine lubricant to industrial workshops. More recently it introduced a service
where, rather than sell its lubricant, Castrol maintains customers’ machines in top
operating condition. Customers subscribe to a continuing service rather than pur-
chase a product by the litre. The offer shifts from the tangible to the
Salt
Soft drinks
Detergents
Automobiles
Cosmetics
Fast-food outlets
Tangible Intangible
dominant dominant
Fast-food outlets
Advertising agencies
Airlines
Investment management
Consulting
Figure 12.1 Teaching
The goods–service
Source: G. Lynn Shostack, ‘Breaking free from product marketing’, Journal of Marketing, April 1977, p. 77
continuum
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intangible-dominant area of the continuum. The benefits to the customer are in con-
tracting out a non-core maintenance activity to specialists who guarantee
performance. The advantages to Castrol are a more sustainable differential advantage
and a shift away from a customer focus on the price of the product.
This shift from selling products to providing a service is key to understanding modern
marketing. Products are easily copied, price sensitive and often poorly matched to the
individual needs of the buyer. As a result, companies that sell products find it difficult
to sustain profit margins over the longer run. Services offer suppliers the opportunity to
decommoditise their offerings, by focusing on solving the real performance needs of
customers and putting together tailored solutions that offer genuine value. Customers
do not want products, they want solutions to their problems.
Classifying services
Because the service sector covers such a heterogeneous collection of activities, it is
useful to look for classification schemes that group organisations with common man-
agement concerns. This is illustrated in Table 12.1. One major distinction is between
public sector and private sector services. In general, public or government service organ-
isations do not depend upon customers for their incomes. Consequently, they often
lack a customer orientation: satisfying customers is not essential for their survival.
Table 12.1
Category Examples
Classifying services
Ownership
Public National Health Service, police
Private Banks, transport firms
Goals
Profit Hairdressers, insurance
Non-profit Education, charities
Degree of competition
Monopolistic Water companies, police
Competitive Electricity, financial services
Type of market
Consumer Retail, childcare
Industrial Advertising agencies, consultants
Income source
Customers Airlines, dry-cleaners
Donations Charities
Taxation Police, National Health Service
Customer contact
High Health care, hairdresser
Low Postal service, garage
Labour skill
Professional Legal, accounting
Non-professional Fast food, transport
Labour intensity
Labour-bound Education, health care
Equipment-bound Telecommunications, public transport
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Service characteristics
Private sector service organisations are a varied assortment. Most are geared to
making profits, but many, such as charities or educational bodies, do not have share-
holders. Another important distinction is in the competitiveness of the market. Some
services such as policing and water are essentially monopolistic. Not surprisingly,
such organisations often lack a culture of customer service and innovation. For this
reason, and also because services are inherently risky to purchase, they tend to be
more highly regulated than goods. Some are regulated by the government; others,
such as accountancy and law, are regulated by their professional bodies.
Another very important distinction for management is whether the service is high or
low in customer contact. High-contact services are directed at people (e.g. airlines, hair-
dressing, health care); low-contact services are directed at things (e.g. car repair, postal
service, dry-cleaning). The former typically involve the customer going to the supplier’s
premises. Here the appearance and ambience of the facility and those staffing it have a
major impact on how the service is evaluated. The quality of the service process or expe-
rience is as important to consumers as the core service itself. For example, a good
restaurant meal can easily be spoiled by the experience of dealing with a rude waiter.
With low-contact services, on the other hand, the customer is not usually present for
the service process, so that appearance and interpersonal skills are less critical.
Services differ according to whether they are predominantly people based (e.g. educa-
tion, health care) or equipment based (e.g. automatic car washers, bank cash
dispensers). People-based services can rely on highly professional workers (e.g. uni-
versities, law firms, management consultants) or non-professionals (post office,
garden care, secretarial). As we shall see, each type of service raises specific problems
in the areas of quality, productivity and marketing.
Services have five important features that greatly affect how they need to be managed
and marketed. These are summarised in Table 12.2.
Intangibility
Services are intangible. Unlike goods, they cannot be seen, touched, tasted or
smelled. They are an experience or process. This has a number of implications for the
consumer and the supplier. First, for the buyer, uncertainty is increased because serv-
ices lack what psychologists call search qualities – tangible characteristics that the
buyer can evaluate before purchase. For example, while buyers can examine in detail
the shape, colour and features of the car they intend to buy before purchase, they
cannot do the same for a haircut or visit to the dentist. For services, the quality of
what buyers will receive, and how they will receive it, is substantially unknown until
afterwards. At the same time, services are usually high in experience and credence
qualities. Experience qualities are those characteristics that the buyer can assess after
purchase (e.g. quality, efficiency, courtesy). Credence qualities are those features that
are difficult to evaluate even after purchase. For example, most people would find it
difficult to assess how well a car has been serviced even after the job is done.
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Table 12.2
Service characteristics Management implications
Characteristics of
services
Intangibility No product: an act or experience
Sampling difficult: consumer perceived risk
Cannot be displayed: differentiation difficult
No patents: low entry barriers
Inseparability Consumers involved in production: intimate contact
Other customers involved: control problems
Employees personify business: personalised relationships
Service environment: differentiates the business
Mass production difficult: growth requires networks
Heterogeneity Standardisation difficult: depends upon people involved
Quality difficult to control: heterogeneity of environment
Perishability Cannot be stored: no inventories
Peak load problems: low productivity
Difficult to cost services: pricing problems
Lack of ownership Customers cannot own the service: services are leased
Because services are low in search qualities and high in experience and credence qual-
ities, consumers feel more risk in their purchases. Consequently, in making choices,
buyers are more influenced by the credibility of the greater personal information
sources such as word of mouth than by advertising messages paid for by suppliers.
Second, they often seek tangible clues to judge the quality of the service. Such clues
include the appearance of the facility and the staff and the prices being charged.
Finally, because services often involve a subscription element (an insurance policy
usually lasts for a 12-month period) loyalty levels tend to be higher than for fre-
quently purchased products.
Intangibility also causes problems for the supplier. The lack of physical characteristics
makes it difficult to display and differentiate the offer. Intangibility also makes it
impossible to patent service innovations. To deal with these problems, management
can pursue strategies that include the following:
■ Stimulating personal influence sources such as word of mouth. For example,

encourage satisfied customers to recommend the service to their friends. Opinion
leaders can be targeted and incentivised to try the service.
■ Developing tangible cues that suggest high-quality service. These can include the
appearance of the place, staff, equipment, advertising and the symbols used to
brand the service.
Inseparability
Related to intangibility is inseparability. Services are normally produced and con-

sumed at the same time and in the same place. An acupuncture consultation is an
example. The practitioner cannot produce the service without the consumer being
present. Further, the consumer is actually involved in the production process,
answering the practitioner’s questions and describing symptoms. Several conse-
quences follow. First, particularly for high-contact services, since both provider and
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consumer are present, the interaction between the two is an important factor in
determining the consumer’s satisfaction with the service. Often the staff will person-
ify the business to the client. A consumer who likes or admires the staff, is likely to be
pleased with the service.
Second, other consumers are also normally present. They may be waiting in the
queue at the bank, or be present at the next table in the restaurant. Their behaviour
can affect the satisfaction that the service provides. Third, growth is difficult. For a
manufacturer of goods, a growing demand can be met by a bigger factory and using
more distributors and resellers. But because of the simultaneous nature of production
and consumption, this is not possible for services. The buyer and the seller have to
meet. This means that service organisations have to put up many small factories
(restaurants, aeroplane trips, hospitals) where the consumers are located. Production
and marketing cannot be separated. If the service operation requires highly profes-
sional staff, this difficulty of achieving scale economies can be a major hindrance to
growth. The challenge for management is to find ways of levering these scarce
resources to achieve higher productivity. The implications of intangibility for man-
agement include the following:
■ Training staff to interact effectively with clients: teaching them to listen,

empathise and act courteously.
■ Looking for ways to prevent customers from impeding each other’s satisfaction
(e.g. separating smokers and non-smokers in a restaurant).
■ Growth can be facilitated by the following:
– Training: more high-quality staff permits faster growth.

– Larger groups: scarce personnel can be leveraged by building facilities that
permit larger numbers to be serviced simultaneously (e.g. bigger purpose-built
lecture halls).
– Faster working: tasks can be streamlined and non-essential work put off line.
– Multisite locations: standard service modules can be opened (e.g. by franchising).
Heterogeneity
Heterogeneity is the potential for high variability in the quality and consistency of a
service. For example, two successive visits to a restaurant or two campaigns run by
the same advertising agency will not be identical in performance. This arises because
services involve people at the production and the consumption end. The quality of
the result will depend upon the individual staff members in charge of it, the individ-
ual consumers receiving it and the time at which it is performed. All are extremely
variable. Unlike machines, people are not normally predictable and consistent in
their attitude and behaviour. This makes it difficult for the service organisation to
develop a consistent brand image.
Three ways of reducing the effects of heterogeneity are as follows:
■ Investing in personnel selection, motivation and training. Better-trained and moti-

vated staff are more able to follow standard procedures and cope with
unpredictable demands.
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■ Industrialise service. Sometimes equipment can be substituted for staff (e.g. vend-
ing machines). Also the consistency of employee performance can be improved by
detailed job procedures and closer supervision (e.g. McDonald’s).
■ Customising service. The heterogeneity can be converted to an advantage by
emphasising how staff tailor the service to the individual requirements of the cus-
tomer (e.g. Ritz Hotel).
Perishability
Perishability means that services cannot be saved. Hotel rooms not occupied, airline
seats not purchased and telephone line capacity not utilised cannot be stored and
sold later. If demand is steady, this is not much of a problem since staff and capacity
can be planned to match the requirements.
Unfortunately, for most services demand fluctuates, creating major peak-load prob-
lems. A city centre subway or restaurant may be working on average at 50 per cent of
capacity. But this average can mask dramatic differences. At rush-hour a subway
system may be running at 120 per cent of capacity; at off-peak times, it may be only
20 per cent occupied. Failure to meet peak demands creates great customer dissatis-
faction. But putting in the capacity to meet this demand normally results in a very
low average return on assets and low labour productivity.
To reconcile good service with satisfactory productivity, managers need to explore
ways of achieving a better match between demand and supply. The problems of
demand peaks can often be mitigated in the following ways:
■ Differential pricing. Peak users can be made to pay more than off-peak users. This
has the double advantage that peak demand is reduced and those responsible for
incurring the incremental capital costs pay more towards them.
■ Making waiting times more acceptable. If peak users have to wait, they can, for
example, be given comfortable seats or complimentary refreshments.
■ Increase off-peak demand. This involves opening facilities for other uses (e.g. busi-
ness hotels promote to tourists for weekend use).
■ Use of reservation systems. Demand can be managed to control the peaks and
encourage acceptable substitution at other times.
As well as dampening peak demand, peak supply can often be increased in the fol-
lowing ways.
■ Using part-time employees. Staff can be hired just for the peak periods.
■ Rescheduling work. Staff only perform essential tasks at peak times and push
administrative and routine maintenance to off-peak times.
■ Increasing consumer participation. Consumers can be encouraged to undertake cer-
tain straightforward tasks, such as clearing their table after they have finished their
restaurant meal.
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Service tasks
Ownership
Lack of ownership is a basic difference between a service and a good. With goods,
buyers have full use of the product and the benefits it provides. They can consume it,
store it or sell it. But with a service, a customer may only have personal access to it
(e.g. a hotel room, an airline trip) for a limited time. Payment is usually for the use
of, access to or hire of items.2
To overcome this problem, management can employ one or more of the following
approaches:
■ Stress the advantages of non-ownership (e.g. easier payment terms, less risk of cap-
ital loss).
■ Create membership associations to provide the appearance of ownership (e.g. exec-
utive clubs for air travellers).
■ Provide incentives for frequent use (e.g. discounts, free flights).
Service tasks
These special characteristics lead to four central tasks facing managers of service
organisations. These are the management of quality, productivity, human relations
and differentiation.
Managing quality
Studies show that the perceived relative quality of a product or service is the single
most important factor determining its long-run market share and profitability. The
Strategic Planning Institute found that businesses that rate poorly on service quality
lose market share at the rate of 2 per cent a year and earn on average only 1 per cent
on sales. Companies that score high on service quality gain market share at 6 per cent
a year and average a 12 per cent return on sales.3 The pursuit of quality has probably
been the most important competitive priority in the last decade as managers have
sought to respond to the demands of consumers for ever-improving standards.
However, ‘quality’ in the service sector is a concept that customers find difficult to
articulate and researchers find hard to quantify. Most of the research on quality has
come from the goods sector. The Japanese define it as ‘zero defects – doing it right the
first time’. Philip Crosby, one of the quality ‘gurus’, defines it as ‘conformance to
requirements’.4 Garvin measured quality by counting the number of ‘internal’ fail-
ures (those identified before a product leaves the factory) and ‘external’ failures
(those occurring in the field after a product has been sold).5
But these concepts are harder to define and achieve in services. First, it is hard to
measure quality because intangibility means that there are rarely physical quality
standards (e.g. colour, fit, tolerance) that can be set and measured. Second, hetero-
geneity means that achieving consistency in standards is particularly difficult. Third,
the inseparability of production and consumption mean that consumer participation
makes it even more difficult for management to control the quality process.
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This last point raises one other problem in the management of quality. The interaction
of the consumer and producer, which is a particular feature of services, means that
consumers evaluate quality not just in terms of the outcome, but also in terms of the
process or the manner in which the service is delivered. For example, a hairdresser is
judged not just in terms of the haircut received, but also by such things as the courtesy
of the staff and the ambience of the shop. Managers of service organisations therefore
have to focus on both the quality of outcomes and the quality of the processes.
Determinants of service quality

If managers are to improve quality, what should they focus on? One influential study
found that there are up to ten criteria used by consumers to judge quality.6 The first
five are particularly related to the quality of the ‘outcomes’, while the remainder refer
mainly to the quality of the ‘process’.
■ Reliability. How consistent and dependable is the service?
■ Access. Is the service easily accessible and delivered with little waiting?
■ Credibility. Can consumers trust the company?
■ Security. Is the service free from risk and danger?
■ Knowledge. Does the company make every effort to understand the needs of the
consumers?
■ Responsiveness. How willing are employees to provide service?
■ Competence. Do staff have the knowledge and skills required to give good service?
■ Courtesy. Are staff polite and considerate to consumers?
■ Communication. Does the company clearly explain its service?
■ Tangibles. Does the appearance of the personnel, the facility and other tangible evi-
dence of the service project an image of high quality?
Expectations and performance

Customers judge quality by comparing the service they receive along these dimen-
sions with what they expected. If perceived quality exceeds expectations then they
are satisfied, even delighted. If performance falls below expectations, they will be dis-
satisfied and are likely to look for alternative suppliers. The expectations of
consumers are created by past experience, word of mouth, advertising and other
forms of communication. This is illustrated in Figure 12.2. The task of management is
to seek to meet these expectations.
Four problems can cause a gap between what consumers expect and what they per-
ceive that they receive. To improve quality, these are the areas upon which
management must focus.
■ Management misperception. A quality gap often occurs because managers do not
research the important service attributes desired by customers. Managers often
think they know what consumers want, but because they have never undertaken
any objective research, these perceptions are wrong. Management is not focusing
on the right areas.
■ Misspecification of service quality. Even if managers know where the company is
failing to meet expectations, they are often unwilling, unable or simply do not
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Service tasks
Word of Personal Past

mouth needs experience
Expected
service
Perceived
service
quality
Perceived
service
Figure 12.2
Determinants of
Source: A. Parasuraman, V. A. Zeithaml and Leonard L. Berry, ‘A conceptual model of service quality and the
perceived service
implications for further research’, Journal of Marketing, Fall 1985, p. 48
quality
care enough to put the resources into solving the problem. For example, many
banks are aware that customers have annoying waits at lunchtimes, but they are
unwilling to reschedule staff hours to resolve the issue.
■ Service delivery gap. Even when managers recognise problems and put in the
resources, service quality may still be substandard because the customer contact staff
are inadequately motivated or incapable of consistently achieving service targets.
■ Communications that overpromise. If the firm’s advertising or selling overpromises,
it will lower perception of quality when the performance fails to reach the hyped-
up expectations. Even good service can be judged harshly if it exaggerates how
high its service levels actually are.
These concepts identify where managers need to focus to achieve high-quality serv-
ice. To summarise: first, managers need to develop the right strategy. This means
identifying the business’s target market and finding out what attributes are most
desired by consumers. What does quality mean to them? Second, service organisa-
tions require an overriding top management commitment to high service standards.
Third, service quality requires detailed implementation. This involves setting high
and measurable performance standards, training and motivating staff, and carefully
working out systems for monitoring performance and comparing against standards.
Monitoring is particularly important. Successful service organisations regularly under-
take consumer surveys to ensure that standards are being achieved. Finally,
communications should be designed to avoid making promises that will not be kept.
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Managing productivity
There is considerable concern about low productivity in the service sector. In part this is
a statistical problem – it is extremely difficult to measure output improvements in serv-
ices, since there is no tangible product to count. While productivity improvements can
be measured for a car factory by looking at the numbers, it is much more difficult to
measure them for, say, a management consultancy. However, there are real productivity
issues in services. These stem from three main areas. First, the high consumer involve-
ment makes it difficult to standardise and automate the service process. Second,
services are usually labour intensive. Third, the perishable nature of services generally
leads to excess capacity and a consequent downward pressure on return on investment.
In seeking to improve the productivity of the operation, management hits the famil-
iar conflict between efficiency and effectiveness head-on. For example, efficiency
could be increased by having teachers teach bigger classes, or getting doctors to
handle more patients by giving less time to each one. But in both cases a reduction in
effectiveness or perceived quality for the consumer would be the probable trade-off.
Management creativity is needed to handle this dilemma. There are four possible
routes to improving productivity without sacrificing quality.
Separating high- and low-contact activities

The greater the amount of customer contact involved in providing the service, the
more difficult it is to streamline and expedite it. The manufacturer of goods, for
example, can be highly automated because consumers are not involved in the pro-
duction process. Some services are extremely high contact (e.g. health care); others
are less so (e.g. post office). More interestingly, most services are a mixture of high-
and low-contact activities. For example, an airline has high-contact ticket counters
and low-contact baggage handling. Banks have high-contact front desks and low-con-
tact back offices that process information.
If management can sharply compartmentalise the two activities, it can seek to max-
imise the efficiency of the low-contact area and maximise the effectiveness of the
high-contact area. The former is organised to maximise productivity, while the latter
is geared towards maximising the quality of the service.
Production-line approach to service

Theodore Levitt advocated the use of a production-line approach to both the ‘front’
and ‘back’ of the house activities by the application of hard and soft technologies.7
Hard technologies mean substituting machinery for people. Examples are the auto-
matic car wash, bank cash dispensers and automatic vending machines. Soft
technologies are the use of systems to cut down on the number of service people.
Examples are the self-service salad bar in a restaurant, the supermarket and the
McDonald’s type of fast-food outlet.
So far, such technological solutions have been largely limited to services where cus-
tomers will accept standardised outputs. However, with continual technical progress,
particularly in computing, and customers’ increasing familiarity with technology and
systems, the production-line approach looks likely to advance into even more cus-
tomised service areas.
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Service tasks
Increasing customer participation

Another way of taking costs out of the service operation is to get customers to do
more of the work themselves. People are now used to filling their own car petrol
tanks, carrying their bags onto low-cost airliners and clearing their table at
McDonald’s. But taking staff out should not be done lightly. Customers will often
resent the loss of a familiar service.
Any such changes need to be based upon an understanding of how customers behave
and what they want. Changes should be pre-tested and the benefits should be care-
fully explained. If the changes are introduced properly, consumers often like a more
active role. Changes can also be positioned as benefits. For example, many hotels
have put mini-bars in the bedrooms to economise on staff. The facilities are pre-
sented to guests as for their convenience and ‘an extra’.
Balancing supply and demand

Matching fluctuating demand with a fixed capacity is a special problem with services
because of the inability to hold inventories. Opportunities to increase productivity lie
in smoothing demand or increasing the flexibility of supply.
As noted earlier, demand peaks can sometimes be influenced by differential pricing,
reservation systems, attracting non-peak demand and extending courtesies to cus-
tomers who have to wait at peak times. Supply flexibility can often be increased by
greater use of part-time employees, sharing services with other organisations and
more efficient use of peak-time facilities and employees.
Managing service staff

Human relations has to be a particular concern in managing services, especially in
high-contact services. The inability to separate manufacturing from marketing means
that the consumer normally meets a wider spread of employees. Each interaction
between employee and consumer will differ. Each is a ‘moment of truth’ for the
organisation – where it is decisively judged by its customers. Normal methods of
supervision and quality control do not work because, unlike a product, an unsatisfac-
tory service transaction cannot be halted, examined and recycled before the
consumer sees it.
In goods companies, marketing’s primary focus is external – on customers – but in
services it also has to be internal – on employees. Unless the needs of employees are
understood and met by management, the organisation will not have staff who buy
into the service mission. Heskett describes the objective as producing a ‘quality
wheel’ (see Figure 12.3). Highly motivated employees deliver high-quality service,
which in turn leads to satisfied customers, more business and on to employee satis-
faction and enhanced motivation. Here are some techniques used with good results
to motivate employees and trigger this quality wheel:
■ Employee-of-the-month awards. These involve monetary and non-monetary incen-
tives to emphasise quality.
■ Increase employees’ visibility and proximity to customers. Employees become more
conscious of quality when they can see and hear directly how the customer
responds to their work.
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Great
employee
Increased satisfaction
volume of
business
Quality High
wheel employee
motivation
Great
customer
satisfaction
High level of
service quality
compared with
level customer
expects
Figure 12.3
Source: Reprinted by permission of Harvard Business Review from James L. Heskett, ‘Lessons in the service sector’,
The service quality
March–April 1987. Copyright © 1987 by the Harvard Business School Publishing Corp; all rights reserved
wheel
■ Training and indoctrination. It is important to get new staff to feel pride in the com-
pany and a sense of its special tradition or mission.
■ Peer group control. Commitment and team building are reinforced when staff are
chosen and reviewed by the colleagues with whom they work.
■ Appropriate environment. Motivation depends upon employees having the appro-
priate equipment, facilities and systems to be able to satisfy the customer.
Achieving differentiation
It should be clear that achieving a differential advantage for a service operation raises
particular difficulties. These arise from the following problems:
■ Integrated marketing and operations. In manufacturing, marketing and production

decisions are usually taken by separate functional managers. In services, unit man-
agers (e.g. bank managers, hospital administrators) are normally responsible for
both marketing and operational activities. Marketing thinking can often be
‘crowded out’ by the operational problems of keeping the bank or the hospital
functioning efficiently.
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Services marketing strategy
■ No product differentiation. Unlike goods marketing, there is no tangible product to

compare. A prospective buyer of a car can compare the design, engineering and
specifications of alternative models in advance; a prospective buyer of a manage-
ment consultancy service cannot see which of the alternative suppliers looks most
attractive.
■ No patent protection. Service advantages generated by innovative systems or lay-
outs are normally easily copied. As a result, it is often easy for new competitors to
enter or to erode the differential.
■ Difficult to control customer interface. Consistent performance in quality is hard to
obtain because it depends upon the unpredictable behaviour of individual con-
sumers and employees. The result is that a consistent brand image is not easily built.
■ Problems of growth. Scale economies in producing services can rarely be achieved.
Growth normally requires setting up a network of small, autonomous ‘factories’. It
means that growing services must attract more and more ‘general’ managers.
■ Difficult to improve productivity. Services are hard to automate without driving down
service quality. Consequently, unlike products, the prices of services do not usually
decline over time.
■ Problems in innovation. Service innovations normally have the added problem of
requiring consumers to change their behaviour. For example, consumers had to be
motivated to use cash dispensers and taught how to use them.
■ Restrictive regulations. In general, service managements are more constrained than
manufacturers in what they can do and say about their businesses.
In the following sections we will look at how service managements can seek to deal
with these problems of marketing and differentiation.
Because of the high interface with consumers, the development of services marketing
strategy must place much greater attention on integrating with an effective operating
strategy. Marketing and operations have to be designed together if the company is to
achieve high service quality with a viable cost structure. This is often misunderstood,
particularly by managers who move into services from the manufacturing sector. For
example, Bass, then one of Europe’s largest brewers, decided to diversify by building a
chain of American-style restaurants aimed at younger professionals and their families.
The company did thorough market research and came up with a first-rate marketing
concept. The restaurants were internally and externally charismatic, and the food
and service were excellent. Financially, however, the business was a disaster. The loca-
tions chosen were extremely expensive, the facilities required too high an investment
and the service was very labour intensive. In addition, the menu was too broad,
resulting in high wastage and high variable costs. The result was that the restaurant
needed an 80 per cent occupancy rate just to break even.
There are four central components of a services marketing strategy. First, the target
market segment has to be defined and analysed. Second, a clear differential advan-
tage and service positioning concept has to be developed. Third, an operating
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strategy has to be created that is internally consistent with the marketing strategy
and which achieves high value–cost leverage. Finally, the marketing mix has to be
specified and implemented.
Target market segmentation

As always, the initial task is to analyse the market. This entails first breaking the
potential market down into segments according to how customers differ in needs and
price sensitivities. Second, management should measure the attractiveness of the dif-
ferent segments and choose the segment or segments that look most appropriate.
Attractiveness will be a function of the size of the market segment, its growth rate,
the intensity of competition, average profit margins and the fit to the organisation’s
own current or potential capabilities.
The next step is to research in detail the existing and latent wants of customers.
What are the problems that customers face? What does good service quality mean to
them? Who are the competitors serving this target market? How well are competitors
meeting the expectations of consumers?
Differential advantage
After the target market is defined, a positioning concept has to be created that will
give customers a strong reason for preference. Such a service concept needs to be
based upon an understanding of what service attributes are most important to con-
sumers, and where competitors are not meeting the actual or potential expectations
of consumers. This service concept may be based upon superior reliability, faster
response time, better work, greater convenience or some other attribute.
Once the service concept is formulated, management then needs to plan how it is to
be communicated to consumers in terms of design, delivery and promotion. What
type of facilities will be required? What kind of people are needed to provide the
service? How do standards need to be defined and communicated internally and
externally? Finally, managers should think about the sustainability of the concept
and the creation of barriers to entry. Any successful service concept will soon find
that competitors seek to emulate and improve on it. Competition can sometimes be
pre-empted by fast market entry and gaining a dominant market share. Alternatively,
barriers can often be introduced by advertising and image development.
Operating strategy
Management has to develop an operating strategy that can transform a marketing
opportunity into high performance for the company. There are four steps. The first
step is to search for value–cost leverage. This means maximising the difference
between the value of the service, as perceived by the customer, and the costs to the
company of providing it. A useful starting point is to separate those activities that
directly provide customer value (‘front desk’) and those that are support activities,
which the customer does not normally see (‘back office’). The criterion for the former
should be: how can the operation be designed to maximise customer service? The cri-
terion for the back office should be: how can we minimise cost by standardisation
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and automation? Methods of levering value include exploring the sources of any gaps
between customer expectations and perceived performance, and finding new ways of
motivating service personnel to work more effectively. Cost structures and break-even
can be lowered by better management of capacity and demand, introducing hard and
soft technologies into the operation and exploring whether the consumer can play a
greater part in the production–delivery system.
The second step in developing the operating strategy is the design of the service deliv-
ery system. This consists of three main issues. How will quality and costs be
controlled? This involves setting targets, incentives and rewards for achieving goals. It
also means defining what results will be expected in terms of service quality, costs,
productivity and staff loyalty and morale. Next, what are the key elements of the serv-
ice delivery system? This involves designing the role of staff, technology, equipment
and procedures. Then it is necessary to determine what capacity will be provided and
to estimate what its utilisation will be, both normally and at peak times.
The third component of operation strategy is strategy–systems integration. It is cru-
cial to ensure that the service delivery system and the positioning strategy are
consistent. Customer service quality should not be sacrificed in a vain effort to main-
tain smooth operations or keep costs down. If customers’ expectations are not met,
they will go elsewhere. At the same time, there is no point in management develop-
ing a wonderful consumer service concept if the organisation cannot achieve a level
of productivity to break even with it.
The final component of strategy is one that Heskett calls the inner-directed vision.8
Services are such that performance quality will always depend upon the creation of a
shared vision with employees. The service concept has to be designed from the begin-
ning with the needs of employees in mind. The central questions that managers have
to answer when building the service are: what needs do the employees have, how do
they perceive the service concept, and how can employees share in the ownership
and rewards of the operation?
Service marketing mix

Once a target market, differential advantage and operating strategy are defined, man-
agement will then need to decide on the marketing mix.
Product
Goods can be viewed in terms of their physical attributes, but services are intangible.
This creates two problems for the customer. First, it is often difficult to understand
the service that is being offered. Second, because the customers cannot check out a
service in advance, they do not know in detail what they are going to receive and
how they are going to receive it. The result is higher perceived risk.
Fortunately, most services do employ some tangibles – facilities, people, equipment
and advertising materials – alongside their core service. The most effective approach
to generating confidence is usually to emphasise tangibles that customers can under-
stand. A private hospital should look clean, calm and efficient. A management
consultant’s office should look innovative and prosperous.
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Second, since contact personnel are seen by the customers as embodying the service, it
is crucial that they look right and reflect the image the organisation wishes to present.
Price
Price has a psychological and an economic role. The psychological role of the price is
particularly important in the service sector. Because there is greater uncertainty
attached to buying services, price is sometimes used as a cue to quality. In other words,
low prices may indicate low quality and vice versa. However, such an effect should not
be regarded as universal. It is only likely to apply when there is no other information
available and when the consumer has limited experience of using the service.
Economically, price is a key determinant of the organisation’s revenue and profitabil-
ity. As with goods, the price that can be charged depends upon the perceived quality
of the service offer. Customers will pay a premium for services that they see as offer-
ing superior value. Most markets are highly segmented, so there are usually major
opportunities for companies to price discriminate. Time is a particularly useful basis
for segmentation in service markets. For example, businesspeople want to travel at
convenient hours, while leisure travellers may put up with the inconvenience of very
early or late travel times in order to obtain discounts. Besides time of travel, time of
booking is also often used as a basis for segmentation. Businesspeople normally book
late and want flexible tickets. The airlines, for example, charge very different prices
depending both upon the time of day and the time of booking.
Price discrimination also enables the organisation to utilise its fixed capacity better. At
peak times, high prices ration capacity and low off-peak prices can stimulate demand.
Communications
Intangibles are more difficult to advertise, promote and communicate than products.
It is not easy to depict in the media the performance of a service. The key is therefore
to choose tangibles and symbols that the consumer can more easily grasp and associ-
ate with the characteristics of the service. Shostack contrasted the approach to
advertising goods and services. She noted that, in product advertising, the advertiser
seeks to enhance the physical product with abstract images. Coca-Cola, for example,
is surrounded with associations of youth and glamour. By contrast, services are
already abstract. To compound this abstraction would dilute the ‘reality’, so instead
the advertiser relies on boosting the reality with tangible items.
Because of the experiential nature of services, word of mouth can be more powerful
than advertising. Consequently, service firms should seek to encourage customers to
tell their friends about the good performance they receive. Some firms, such as
American Express, provide rewards for customers who introduce friends or colleagues
to the service. Direct selling can also be a powerful opportunity for service firms.
Because consumer and contact staff meet, there is scope for personnel to promote the
reputation of the organisation and sell additional services.
Finally, one should note that service advertising and communications often have a
dual audience – the external and internal customer. Many service organisations
design their messages with an eye on having a positive effect on customer contact
personnel. Television advertising, for example, can be an important tool for motivat-
ing employees.
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Distribution
Almost by definition, high-contact services have to be distributed directly because the
supplier and the consumer have to meet. However, economies can often be obtained
by using indirect distribution for components of the service. There are two common
forms of indirect distribution of services. The first is the use of intermediaries. For
example, theatres and sports venues use ticket agencies to provide their booking and
reservation services. This allows the service provider to conserve resources and
achieve a much wider market reach. The second is the use of computer-based infor-
mation systems and technology. For example, the increasingly extensive use of the
Internet by airlines allows consumers to access core services without the involvement
of staff. At the same time it allows the airline to use variable pricing to better match
the number of seats they can offer to the demand for travel.
Growth tends to be more difficult for service organisations. Services are time-bound –
they can only produce and sell when customers want to buy the service. They are
also place-bound – growth is limited by the number of people who can conveniently
get to the location. Consequently, even a successful service formula at a single site
has limited potential. A firm then has to choose from four growth directions:9
■ Multisite strategy. This strategy replicates the original service formula in multiple
sites. It is the typical strategy employed by successful fast-food and retail chains. It
is usually the most straightforward strategy. The key issues are finding managers,
obtaining the right locations and administering the growing infrastructure.
Franchising is often a means for rapidly exploiting a multisite strategy.
■ Multiservice strategy. Here the firm seeks to grow by capitalising on its reputation
and knowledge of its customers to sell new services. For example, many university
undergraduate business faculties have sought to grow by adding postgraduate
courses, contract research and executive education to their basic educational serv-
ice. Here the organisation maintains the simplicity of a single site and single
customer base, but adds to the operational complexity of the business with its
growing range of new services.
■ Multisegment strategy. Here the organisation seeks to utilise its spare capacity by
selling its service to new types of customer. For example, the railways seek to sell
the spare capacity available outside peak times to shoppers and holiday-makers.
The marketing problem is, of course, finding new segments that want to buy a
bundle of services designed for another target market.
■ Mixed strategies. Many service organisations drift into combining strategies. For
example, they not only add new locations, but also develop new services and even
new segments. For example, fast-food firms attempt to broaden their menu (multi-
service) while at the same time increasing the number of sites.
Many of the growth problems of service firms are caused by the adoption of these
mixed strategies, which result in a loss of focus and an erosion of the original
service concept.
Such problems account for the comparative lack of success that service firms have had
with international expansion. Retail firms, for example, have often seen international-
isation as simply a multisite strategy. But often the foreign consumer attracted to the
service concept is different from the one in the domestic market (see Box 12.1).
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Box 12.1 Marks and Spencer – international failure

Marks & Spencer made its first major investment in the US in 1988 when it purchased the retail clothing
chain Brooks Brothers. Prior to the 1970s Marks & Spencer had established itself as a jewel in the UK retail
crown. In an effort to extend the service operation it expanded overseas via franchises and stores owned
and managed by the company. In 1975 the company operated 252 stores in the UK and another 2 in
Europe. By 2000 there were 296 UK stores out of a total of 780 worldwide. While these figures
demonstrate physical expansion, revenues did not follow. On average overseas stores generated revenues
at a rate of around one-seventh of the UK average and in 2001 the company decided to close its
international operations. The closure included the flagship store in Paris, which was met with Gallic outrage
which reached to the French Prime Minister, who described the closure as unacceptable and called for the
company to be punished. More significant was the disposal of Brooks Brothers, which was sold at a loss of
around €600m.
These differences pull the organisation into introducing new targeted products. What
was originally a focused service concept then drifts into a multisite, multisegment,
multiservice offer with all the attendant problems of managing such an extremely
complex organisation. Not surprisingly, such organisations frequently fail against
more focused domestic competition.
Marketing within the service organisation

There is no agreed view on how marketing should be organised in service businesses.
Goods manufacturing companies are usually organised along functional lines – man-
ufacturing is dealt with in one department, personnel issues in another, and
marketing decisions by the marketing department. Such an approach has the advan-
tage that it allows each group to develop its own specialist skills, organisation and
culture appropriate to the tasks that it faces. Integrating these separate organisations
does, of course, create problems, but these can often be resolved at a higher level.
Fortunately, in manufacturing companies, the availability of inventory allows manu-
facturing and marketing to operate semi-autonomously, at least in the short term.
Manufacturing needs to know the likely demand that marketing plans to satisfy and
the particular products that are required, but once these targets are agreed, the two
departments can operate independently. Production can then be scheduled to create
inventory as it is needed. Marketing does not need to know when or how production
takes place.
However, in a service firm this compartmentalisation breaks down. There are no
inventories, and production and consumption occur simultaneously. Production
(producing the product) and marketing (satisfying the consumer) are one. The service
operation has to be designed from the beginning to reconcile the trade-off between
the operational need for high productivity and the marketing need to satisfy con-
sumers. When short-term problems and trade-off decisions have to be made at the
site or branch level, they are usually made by a manager, with simultaneous responsi-
bility for operations, marketing and personnel.
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For this reason it is crucial that a marketing orientation permeates all personnel
within the service organisation. Marketing cannot be separated. It has also led many
experts to argue against separate marketing departments within service organisations.
They argue that, if one creates a separate marketing function, the remainder of the
staff will feel that marketing is not their responsibility, with disastrous consequences
for service quality.
As with most complex organisational issues, there is no simple answer: a contingency
approach is required. How you organise marketing departments depends upon sev-
eral facets of the firm and its environment. The issues are represented in Figure 12.4.
Most service firms can be described in two dimensions: the degree of customer con-
tact and the degree of customisation. The higher the customer contact, the more
difficult it is to run a high-productivity organisation. This is because the high
involvement of consumers in the process slows down the system and prevents stan-
dardisation. Similarly, the higher the degree of individual customisation, the more
difficult it is to run an efficient ‘production line’ service.
From an operations perspective, the low/low cell is the ideal. Customer contact and
customisation are minimised, so that the operation can be run almost like an effi-
cient manufacturing plant with a narrow product range. However, from a marketing
perspective the high/high cell might be ideal, since the customer is able to interact
and a solution is designed exactly for the individual. The other two cells look for a
trade-off between efficiency and effectiveness. For example, the firm Conveyancing
Ltd offers the personal contact of a law firm, but simplifies its offer to routine house
conveyancing that it can process with high efficiency.
The different cells suggest different roles and organisations for marketing. In the
high/high cell there is little scope for centralised marketing departments or even spe-
cialised marketing personnel. Responsibility for the product and marketing lies with
the professional operators (e.g. solicitors, consultants, accountants) who have
Degree of customer contact

Low High
Decreasing
efficiency
Management
High Telephone banking
consultancy
Theatre box office
Law office
Degree of
customisation
McDonald’s Travel agent

Low
Post Office Conveyancing Ltd
Decreasing efficiency
Figure 12.4
The customisation/ Source: Adapted from John E. G. Bateson, Managing Services Marketing: Text and readings, 2nd edn. © Bateson
customer contact 1992, reprinted with permission of South-Western a division of Thomson Learning: fax 800 730 2215
matrix
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intensive contact with the clients and customise the service client by client. By con-
trast, in the low/low cell (e.g. car rental) the business is offering highly standardised
services and customer contact is limited. Such a situation makes for centralised mar-
keting and brand development. Site personnel can be trained to follow simple
routines and can be controlled by rules and systems.
In the other two cells, which mix the high and low dimensions, marketing tasks usu-
ally have to be shared. A central marketing department can help to achieve scale
economies in advertising and brand building. It can also act as a change agent in cre-
ating a stronger customer orientation in the business. But a marketing orientation is
crucial among the front-line personnel who have key roles in either customising the
product or in interfacing with clients.
Marketing in the non-business sector

The previous sections have assumed that service organisations are being run with a
view to making a profit for their owners. However, there are two major sectors of
service where this is not true – private non-profit and public sector organisations.
Public sector organisations account for well over half the service sector in most coun-
tries. Private non-profit organisations are smaller, accounting for perhaps 10 per cent
of the sector.
Defining these organisations is not easy, since many non-profit organisations (e.g.
Oxfam, trade unions) engage in activities such as retail shops and mail order cata-
logues that are clearly intended to make a profit. The distinction is that these
profit-making activities are not their primary goal and any profits made are trans-
ferred into their real mission, which is alleviating poverty, protecting its
membership’s interests or some other worthy goal. Blois’ definition is useful: ‘A non-
profit organisation is an organisation whose prime goal is non-economic. However,
in pursuit of that goal it may undertake profit-making activities.’10
A public sector organisation is one that is controlled by and responsible to a govern-
ment body rather than to shareholders or members. Again such a definition is hardly
watertight, since many public sector institutions (e.g. universities) engage in profit-
making activities and rely on a mixture of financing from government, consumers
and voluntary contributions from donors. Some public sector organisations the gov-
ernment would like to see making a surplus (e.g. the Post Office); others are
inherently non-revenue generating (e.g. the police). Finally, there has been a striking
movement towards ‘privatising’ public sector organisations, so that many public
bodies have shifted to become private, for-profit enterprises (e.g. in the UK: gas,
electricity, railways).
Criticisms of non-business organisations

Non-profit, and especially public sector, organisations are in most countries subject
to considerable criticism and hostility. Criticisms focus on both their inefficiency and
ineffectiveness. In terms of efficiency, many are visibly overstaffed. Both non-profit
and public sector bodies have not had the same pressure to reduce overheads and
administrative costs. In addition, the capital invested in them often appears to have
had minimal effects on productivity.
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Their ineffectiveness has been subject to even more criticism. These organisations
have often been extremely slow in reacting to problems. Bureaucracy and overcom-
plex systems have often prevented even simple difficulties from being identified and
quickly resolved. They have also often lacked any customer orientation. Few would
put as a goal ‘delighting the customer’. Many appear to be run for the convenience of
the staff. Their primary aim often appears to be preserving the jobs of the people
working there, discouraging change and avoiding increased effort.
A reporter investigated why a public hospital always woke its patients at 5.30 a.m.
This seemed unnecessarily early, particularly since they had to wait until 8.00 a.m.
before receiving breakfast. The reason discovered was that the staff changed shifts at
6.30 a.m. and staff had agreed that a ‘fair’ schedule for them was that the leaving
shift should wake the patients, allowing the new shift an hour to ‘settle in’ before
they had to deliver breakfasts.
Not only is the performance of so many of these organisations poor, but it appears to
be getting worse. Services that 50 years ago were seen as efficient and effective are
now visibly unable to perform. The postal service, education, hospitals and the police
are all perceived by the public to be deteriorating and often in critical condition. This
lack of confidence has been the driving force behind the move to ‘privatise’ as many
services as possible.
However, the causes of this crisis are not well understood. Many rationales appear to
be unconvincing alibis rather than true explanations. Some of the more common
alibis are the following.
Multiple stakeholders
Some argue that achieving performance in non-business organisations is more diffi-
cult because they have multiple stakeholders. But, as shown in Chapter 1, it has
never been true that effective businesses have only sought to maximise the profits of
their shareholders. Successful companies have always sought to balance the partially
conflicting goals of multiple stakeholder groups – shareholders, customers, employ-
ees, managers, suppliers, creditors and the communities in which they operate.
Ambiguous goals
Non-business organisations have multiple constituencies. For example, Professor
Shapiro of Harvard saw the difference between a profit and a non-profit organisation
as being that the former has only one constituency – customers ‘to which it provides
products and from which it receives funds’.11 By contrast, a non-profit organisation
has to market to two constituencies: ‘clients to whom it provides products, and
donors from whom it receives resources’. However, again such an explanation
appears too simple. In fact many, if not most, businesses have multiple constituen-
cies. For example, financial institutions have to appeal to both savers to obtain funds
and investors to purchase their services. These constituencies have different and even
conflicting requirements.
Poor-quality employees
Another common explanation is that these organisations do not attract good people.
But again it is not obvious that those who hold managerial and professional jobs in
hospitals, universities or other non-profit services are less qualified or honest than
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those in business. In America and Europe there are many examples of top business
managers being put in control of public and non-profit organisations. Few have done
better than the ‘bureaucrats’ they replaced. Indeed, most became bureaucrats them-
selves. The fault appears to be with the system rather than with the people.
Unmeasurable outputs
A common defence is that the objectives of a non-business organisation are not quan-
tifiable. Hence, the success or performance of such an organisation cannot be easily
judged. But once more this explanation appears unconvincing. Any mission, even that
for a successful business, is intangible. Marks & Spencer, for example, defines its mis-
sion as ‘To make aspirational quality accessible to all’. Ford defines its mission as
‘providing personal mobility for people around the world’. These are equally as intan-
gible as Oxfam’s goal of ‘overcoming poverty and suffering’, that of the churches of
‘saving souls’ or the mission of the police to ‘safeguard the community’.
However, what successful businesses do, but which few non-business organisations
achieve, is to translate these broad missions into more specific, clearly defined targets
that are measurable. ‘Saving souls’ is not measurable, but church attendance is.
‘Overcoming poverty’ is intangible, but delivering 1 million daily food equivalents or
building 100 field hospitals is a very tangible target. Only if such output goals are
defined can resources be allocated and performance improved. In contrast, many
non-business organisations measure performance in terms of inputs rather than out-
puts. They use the money they receive or the size of the organisation they build as a
measure of performance. Of course, such measures contribute more to increasing
bureaucracy than to the organisation’s efficiency and effectiveness.
Characteristics of non-business organisations

The real differences that account for the poor performance of most non-business
organisations are three – the lack of a profit measure, funding being divorced from
the market, and the monopoly power most possess.
Lack of profit measure

Profit is not the objective of business managers, but it is a requirement. Investors will
not supply capital unless they see an adequate return. This requirement ensures that
managers will normally seek to operate the business efficiently: that capital and
people are not wasted.
Non-profit businesses are created because it is believed either that insufficient private
capital would be attracted to do the ‘necessary’ job, or that a private solution would
be unfair. The former occurs where there are ‘externalities’. Individuals would not
buy enough of the product or service because they are shortsighted or because they
do not take into account the benefits received by others. For example, voluntary pay-
ments would not be likely to be sufficient for the defence budget or similar ‘public
goods’. Charities are needed because the poorest people cannot afford to buy food or
health care. Hence reliance on the market would be socially unacceptable.
However, once the profit measure is taken away, there is no natural test of organisa-
tional efficiency. There is no measure of the return that managers are obtaining on
the resources they have at their disposal. With no test of performance, not surpris-
ingly, capital and people tend to be used inefficiently.
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Funding divorced from the market

While some non-businesses obtain their revenues from customers, most do not. In
the public sector, most receive all or a substantial part from taxation (e.g. the health
service, education, police). In the private non-profit sector (e.g. Cancer Research,
Salvation Army) donors provide the majority of funding.
This is the most fundamental distinction between profit and non-business organisa-
tions. Businesses (in competitive markets) are paid only if they satisfy customers.
Customer satisfaction is, therefore, the basis for achieving performance and results. By
contrast, the revenues of non-businesses do not depend upon performance. They are
paid out of taxation or from the generosity of donors who often do not consume the
outputs of the organisation. Such revenues depend more upon promises than deeds.
Being paid out of taxes or donations changes what is meant by performance.
Performance for a manager in a non-business organisation is the ability to increase the
budget or the staff. Satisfying customers inevitably becomes a secondary consideration
because it does not determine the survival of the organisation or the career prospects
of the managers. This disconnection from the market has three consequences.
First, it discourages efficiency. Administrators know that not to spend every penny of
the budget will only convince the sponsors that the budget for next year can be
safely cut. Second, there is no pressure to set priorities and concentrate resources on
them. The overstretched police force is a good example. All the crime statistics show
that the police are increasingly unable to cope. Rather than focus on the obvious pri-
orities of protecting citisens from serious crime, they divert efforts to the old lady
who has lost her cat, or to help the man who has locked himself out of his home or
car. Resources are misallocated this way because the police do not want the local
politicians who set their budgets receiving complaints from the voters. The result is
that the proportion of serious unsolved crimes continues to escalate.
Finally, no institution likes to abandon anything that it does. In the profit sector, the
choices of consumers kill off obsolete products or services. But in non-profit and
public sector organisations no such discipline exists. Maintaining the past is regarded
as virtuous and innovation is seen as a threat to jobs.
Monopoly power
Competition is the key to making organisations operate effectively. When organisa-
tions do not face vigorous competition – whether they are in the public or private
sector – they perform poorly. Most non-business organisations have some form of
monopoly power. In the public sector (e.g. social services, police, army), it is usually a
natural or legal monopoly. In the non-profit sector (e.g. charities), the power is gener-
ally based on demand substantially exceeding supply. In both situations because
competition is weak the consumer lacks a choice. This, of course, amplifies the exist-
ing tendencies towards inefficiency and lack of customer orientation. Inefficiencies
can be hidden in some organisations by raising prices (e.g. the television licence or
water), and in others by allowing the service to deteriorate (e.g. schools). The lack of
consumer choice means that there is no reason to satisfy consumers – they are
obliged to use the service. The consequence is that non-business staff typically lack
the courtesy and professionalism found in competitive, profit-oriented businesses.
They usually believe that they know what is wanted better than the consumer. The
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service is run for the benefit of the people who work there rather than the customers
they are meant to serve.
Striking evidence of these features is provided by the increasing number of public
sector institutions that have moved to attract additional resources by setting up activ-
ities which compete in the private sector. State hospitals that compete for fee-paying
patients or universities which introduce courses for executives are typical examples.
To be successful, the organisations rapidly learn that they have to segment the cus-
tomer base like an airline. The traditional, tied customers (e.g. National Health
Service patients) get ‘economy class’ treatment. The new, fee-paying customers, who
have the power to choose, receive ‘executive class’ treatment: their needs are
analysed, their wants are quickly tended to, and they obtain upgraded facilities and
the attention of the best staff. It is clear that non-business organisations can perform
if the systems are right.
Systems for non-business organisations

The challenge for top managers in non-business organisations is to create the systems
that will allow people to perform efficiently and effectively. Without the right sys-
tems, non-businesses will lack direction, will have no basis for rationally allocating
resources, and will leave both staff and customers frustrated by the organisation’s fail-
ure to perform (see Box 12.2). In many ways, such systems are more important to the
non-business sector than they are to the competitive profit-oriented firm. With the
latter, competition, the choices of customers and the pressure to meet the profit
requirement force the firm towards adding value if it is to survive. But, as we have
seen, for public sector and non-profit institutions such forces do not exist. Making
non-businesses perform requires five steps (see Box 12.3).12
Box 12.2 Public sector mismanagement

Concerned people assume that more public investment means better public services – better roads,
healthcare and education. But studies show that public sector mismanagement wastes much of the
investment. Among the most shocking examples is investment in the developing countries. After investing
$200 billion a year in infrastructure, the World Bank found that 1 billion people still have no clean water
and over 2 billion are without sanitation and electricity.
The Bank found that resources were squandered in several ways. Facilities were not maintained. For
example, an average 40 per cent of power-generating equipment was out of action. Infrastructure, roads
and power stations were built in the wrong places. Services were run with woeful inefficiency. Two-thirds of
rail staff in some countries were adding no value. Finally, prices were held below marginal costs, thus
requiring large state subsidies.
Government involvement was found to be the root of the problem. The World Bank proposed a three-part
solution: first, making the services run on clear business-like lines with professional managers or private sector
firms contracted to run them; second, introducing more competition to break down their monopoly power; and
third, involving consumers directly in planning, designing and paying for projects, especially at the local level.
Many countries now think privatisation is the most effective way of achieving the transformation.
Source: World Development Report 1994: Infrastructure for development (Oxford: Oxford University Press, 1994)
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Box 12.3 Planning in the non-business sector

1 Mission statement 4 Performance measures
Customer scope Customer satisfaction
Vision of the organisation Output measures
Distinctive competences
Key stakeholders 5 Feedback on performance
Self-control
2 Organisational objectives Appraisal
Customer Incentives
Innovation
Resources
Productivity
Regulatory
3 Strategic plan
Marketing audit
Priority setting
Marketing mix
Action plan
Defining the mission

First, management needs to define the mission of the organisation. The mission state-
ment, as in the private sector, should answer four questions.
■ Who are the ‘customers’ it aims to serve?
■ What is the vision of what it wants to accomplish?
■ What is its distinctive competence – what can it do better than other organisations?
■ Who are the stakeholders whose interests it must seek to satisfy?
Most non-business organisations have not thought through these questions. The
alternative answers and conflicting interests have not been brought into the open,
discussed and evaluated and the necessary trade-offs determined. As a result, manage-
ment has no basis for getting agreement on priorities or for allocating resources and
measuring performance. Activities are justified on vague ‘public interest’ arguments
and good intentions. Failures are explained away as due to lack of resources or the
results of mistaken political directives. In effect, managers abdicate responsibility for
strategy in favour of administrative or bureaucratic work.
Setting measurable objectives

Once management has an agreed mission, this needs to be disaggregated into clear,
specific, measurable objectives that people can commit to and which, if achieved,
will progress the mission. Objectives should cover four fundamental areas. First, and
most important, are the customer objectives. For a hospital one objective might be to
reduce waiting time for operations by 50 per cent in the next two years. For a police
force, one could be increasing the detection rate for violent crime by 30 per cent. It is
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crucial that such objectives are relevant. Relevance means being based upon research
into what needs customers most want satisfied.
Second, the organisation should have innovation objectives that enable it to do new
important things or to do existing things radically better. Third, it needs resource
objectives. For a charity this may mean setting targets for donations and legacies that
are necessary to achieve its mission. It may also mean attracting particular profes-
sional skills or obtaining specialised equipment to do a better job. Fourth, like any
efficient organisation it should have productivity objectives that indicate the outputs
to be obtained. Finally, non-business organisations normally need regulatory objec-
tives – goals set for them by governments or regulatory bodies.
Developing strategies
Next, management has to develop strategies to achieve its objectives and mission.
This involves four tasks. First, there should be a thorough marketing audit to identify
those activities within the organisation’s portfolio where it is doing well, meeting
objectives and achieving results. It should also identify those areas where it could do
well if resources were put there. For a charity such as Christian Aid, these units of
analysis might be countries. For a university, they might be programmes or depart-
ments. The organisation should then identify those activities where it is doing poorly
and where real results are never likely to be achieved.
This analysis should then allow the organisation to set priorities. In which areas can it
really add value and meet needs? These are the areas where resources should be con-
centrated. Which areas should be eliminated if stakeholders and regulators will permit
this to happen? Which activities should be left on a ‘care and maintenance’ basis? Most
organisations will then need to develop a marketing plan to implement these priorities.
This will mean defining target markets. Often there will be two sets of customers to
target – recipients and donors. It will also need a marketing mix: a communications
programme, distribution channels, product policy and often pricing decisions.
For example, a cancer charity will need to target selectively the types of men and
women it can best help – its potential ‘customers’. It will also need to analyse the
market for potential donors – who are most likely to be willing to donate to this char-
ity? It will then need to develop a communications programme to appeal to both
groups. This will include setting a budget and choosing media and message: for
example, ‘Fight cancer with a check-up and a cheque’. It may also need a distribution
policy – where should it locate offices for local fund raising and operations? It will
have ‘product’ decisions too. In fighting cancer should it focus on cancer screening,
research, informing the public or some other product option? Finally, there may be
pricing decisions – should it ask people to contribute if they receive, say, a cancer
test? If so, how much?
Finally, the organisation should produce an action plan. This will detail what needs
to be done over the coming year and who will be responsible for doing it.
Establishing performance measures

Next, management needs to think through measures of performance. The question is:
how can managers judge whether they are doing their jobs well? In profit-oriented
firms this is usually a straightforward task. The main measures of performance are mar-
keting and financial results. But in non-business organisations performance is different.
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Management needs two types of performance measure. The first, and most impor-
tant, are customer satisfaction measures. Because the market does not work for these
organisations, it is crucial to have direct, regular and systematic feedback from cus-
tomers on how satisfied they are with the service and its major components – the
core service, the behaviour and attitudes of the staff, the quality of the facilities, the
pre- and post-delivery services, and so on. This is the key to shifting staff from a ‘we
know best’ attitude to their clients.
Second, management needs to think through the output measures that are relevant
for calibrating performance. For a hospital these might be survival rates, the number
of operations it performs in a period, or the length of the waiting list. Output meas-
ures are essential to shift the organisation away from an input focus, where the size
of the budget or the number of staff acts as a measure of success.
Providing feedback
These performance measures should then be used to provide employees with feed-
back on their work. The customer satisfaction and output measures need to be highly
and continuously visible in offices and newsletters, so that the staff can see how they
are doing now. It is particularly valuable if league tables or comparisons can be made
between units of the organisation: for example between different schools in the area,
between hospitals or between similar charities. However, given the resistance to per-
formance evaluation that normally exists within non-business organisations, such
changes need to be carefully and sympathetically prepared.
Feedback gives staff the information to manage themselves better. For example, in
some university departments degree students now rate the performance of the profes-
sors teaching their courses and the results are published each term (a practice,
incidentally, that has always existed on university ‘for-profit’ courses). The result is
always a dramatic and speedy improvement in teaching performance. Before the
feedback was provided, many professors had no idea how bad they were. Others did
not care, since their poor performance was never revealed. Once comparative infor-
mation is available, every professor wants to do good work.
A perspective
The failure of public sector organisations to manage themselves properly led, in the
1980s, to a revulsion against them and pressure to privatise as many as possible. In
general, privatisation brought substantial benefits in terms of greater customer orien-
tation and higher productivity. However, there will always be a need for a public
sector and for private non-profit organisations. Improving these organisations
requires the government to introduce the right frameworks and managers more capa-
ble of providing vision, strategy and systems.
The right framework depends upon the type of organisation. Drucker distinguished
three types: natural monopolies, service institutions paid out of budgets, and policy
areas.13 Natural monopolies are those institutions that must have exclusive rights in a
given area, such as the water authority. Without control, such monopolies, besides
being inefficient and ineffective, will inevitably exploit the consumer. The question
then is: should it be under public ownership or public regulation? The evidence is
strongly in favour of private ownership with public regulation. A government-owned
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monopoly of the telecommunications system or the railways, for example, may not
exploit, but customers have no redress against inefficiency, poor service, high prices
and a general disregard of their wants. An independently managed monopoly under
public regulation is likely to be far more responsive to customer dissatisfaction
because this influences the public regulatory body that sets the organisation’s rates
and hence its revenues and profits.
The second type are organisations paid out of governmental budgets, including
schools and hospitals. They have two significant characteristics. First, they supply a
need rather than a want. Second, demand greatly exceeds supply, so there is little
pressure to be responsive to the consumer or to improve efficiency and service. The
answer most countries are edging towards to handle these organisations is to stimu-
late regulated competition. Parents can be given vouchers to equal the cost of tuition
and they can then choose the school from a list of approved suppliers. This is also
being introduced into health services, where hospitals are being required to publish
outcome data on surgical procedures so that general practitioners can identify the
best option for their patients. Competition will gradually lead to a shift of resources
towards those organisations that are more efficient and responsive.
Finally, there are policy areas such as the courts or defence ministries where mana-
gerial autonomy and competition are virtually impossible. Here the only external
stimulus can be the periodic, independent audit of the purposes and performance of
these institutions. Do they still have a purpose? Are they being run in a way that
meets the expectations of the public?
Once the right frameworks are in place, they need to introduce the systems to shift
from an administrative to a managerial focus. Administrators concern themselves
with internal operations and procedures – with inputs – while managers concern
themselves with outputs. The purpose of any public or non-profit organisation is to
serve certain publics – to meet the needs and wants of their ‘customers’. The primary
tasks of management are to define clearly what the organisation’s mission is and
what its priorities are, and to plan how people can be motivated and measured to
perform against these goals.
Summary
The service sector is the largest and most rapidly growing part of the modern economy.
Even in the manufacturing sector most of the new jobs are ‘service’ jobs – research and
development, marketing, information technology and so on, rather than ‘making things’.
The basic principles of marketing all apply in the service sector, but managers have to
note differences in emphasis. These arise from the distinctive character of services –
intangibility, inseparability, variability, perishability and the lack of ownership. These
characteristics create four special problems for managers in the service sector: managing
quality, achieving high productivity, internal marketing and building a differentiated offer.
Especially with high-contact services, marketing strategy must place much greater
attention on integrating with an effective operating strategy. Marketing and operations
cannot be separated in the way that they are in the goods sector. The key issue is
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Notes
building a positioning strategy that jointly leverages high value for customers with a
manageable cost structure and break-even point.
A very large portion of the service sector consists of publicly owned and private non-profit
organisations. While everyone recognises that these are needed, the way most of them
are run is heavily criticised. Most such non-business organisations are inefficient and
unresponsive to their customers. The sources of these problems lie in the lack of profit
measure, the lack of competition and the disconnection of their funding from the market.
Non-businesses can be made to perform, but this requires managers rather than
administrators. The task of management in these organisations is to develop an agreed
mission, set the objectives and strategies, and establish performance measures that
focus on customer satisfaction and outputs.
Questions
1 Why is the service sector growing more rapidly than the manufacturing sector?
2 The most fundamental distinguishing characteristic of services is intangibility. Discuss the
implications of this with specific reference to marketing.
3 Give an example of a business that has substantially increased its service quality and
analyse the reasons for the improvement.
4 Find and analyse a service organisation that has very high productivity. How is it achieved?
What are the trade-offs against service quality?
5 Why do so many publicly owned organisations appear to perform so poorly?
6 Does marketing apply to the non-profit sector?
Notes
1. G. Lynn Shostack, ‘Breaking free from product marketing’, Journal of Marketing, April 1977,
pp. 77–82.
2. Adrian Palmer, ‘Marketing services’, in Michael J. Baker (ed.), The Marketing Book, 5th edn
(London: Heinemann, 2003), pp. 585–608.
(New York: Free Press, 1987), pp. 103–34.
4. Philip B. Crosby, Quality is Free: The art of making quality certain (New York: New American
Library, 1979).
5. David A. Garvin, ‘Quality on the line’, Harvard Business Review, September–October 1983,
pp. 65–73.
6. Leonard L. Berry and A. Parasuraman, Marketing Services: Competing through quality (New
York: Free Press, 1991).
7. Theodore Levitt, ‘Production-line approach to service’, Harvard Business Review,
September–October 1972, pp. 41–52.
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9736 MMST_C12.QXD 12/5/05 2:56 PM Page 378
8. James L. Heskett, ‘Lessons in the service sector’, Harvard Business Review, March–April 1987,
pp. 51–61.
9. John E. G. Bateson, Managing Services Marketing, 2nd edn (Orlando, FL: Dryden Press, 1997),
pp. 390–96.
10. Keith J. Blois, ‘Marketing for non-profit organisations’, in Michael J. Baker (ed.), The
Marketing Book, 4th edn (London: Heinemann, 1999), p. 547.
11. Benson P. Shapiro, ‘Marketing for non-profit organisations’, Harvard Business Review,
September–October 1992, p. 124.
12. This section draws on Peter F. Drucker, Management: Tasks, responsibilities, practices (London:
Heinemann, 1974), pp. 158–66.
13. Ibid., pp. 154–60.
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‘Most corporations are like giant jellies.

You can force them briefly into a new shape.
But unless you can fundamentally reform
the culture, they swiftly wobble
back into their old form.’
Richard Heygate, McKinsey & Co.
Chapter 13 TURNAROUND MANAGEMENT
Decisive strategic change is required when an organisation is in decline or its decline is

anticipated. For a business the symptoms of decline are falling profitability, eroding
market share and deteriorating liquidity. These are the symptoms, but the causes of
decline are different. The fundamental problems are invariably caused by a
transformation occurring in the industry: the emergence of new distribution channels,
new technologies or new competitors with strategies or value chains that permit them to
make superior offers to customers. Such changes make obsolete the strategies of the
firms that have led the industry in the past.
Companies run into a crisis when organisational inertia prevents a sufficiently rapid and
decisive change in strategy to meet the new industry environment (Figure 13.1). Rapid
organisational response is always difficult – especially for a traditional market leader,
because the leader normally has extensive financial assets that have to be written off,
skills and distribution networks which no longer have value and a management culture
which is not effective. Not surprisingly, most organisations find these barriers difficult to
surmount. When such barriers to change are not overcome, the organisation slips into
crisis, exhibiting declining marketing and financial performance.
The tasks of the turnaround manager are to halt this erosion and then develop a
programme of revitalisation. The first task we call consolidation, which largely entails
operational measures to restore profitability and cash flow. These consist of policies to
cut costs, increase margins, remove redundant assets and control cash. The longer-term
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Chapter 13 Tu r n a r o u n d m a n a g e m e n t
and more important strategic task is transformation. This consists of understanding how
the industry is changing and forming a vision of the means by which the business can be
revitalised to regain leadership. Such a vision entails deciding where the new market
opportunities will be, what core competences are needed to capitalise on these
opportunities, and what new supply networks and distribution channels will best create
and deliver the new value that the company will provide.
The next section shows why consolidation and transformation need to be pursued in
partnership. In a turnaround it is very easy to create a situation where these conflict.
Worse, many managers confuse the two, thinking that short-term consolidation or a profit
recovery is synonymous with the successful turnaround. In fact, engineering a short-term
profit recovery is normally straightforward. However, such a recovery is never sustainable
unless management proceeds with the longer-term and more challenging task of dealing
with the causes of the decline through a sustained programme of transformation.
Changes in
industrial environment
Strategy Organisation
• misfit • inertia
Crisis
Symptoms Causes
Consolidation phase
Figure 13.1 Transformation phase

Corporate crisis and
turnaround
Short- versus long-term improvements
Consolidation focuses on short-term profits; transformational change is directed at

long-term market performance. The former views profit as an end in itself; the latter
sees profits as the result of winning the loyalty of customers. Pressures on managers
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Short- versus long-term improvements
to achieve quick results frequently lead to an overemphasis on short-term profits and

a neglect of transformational change. This often has a devastating effect on the firm’s
ability to achieve a long-term turnaround. To see why this occurs we need to look at
the conflicting, time-dependent nature of profit improvement decisions. First, all
decisions affecting the firm’s value chain (i.e. the decisions about products, prices,
promotion, service and distribution channels) have two conflicting effects. For exam-
ple, a cut in price or an increase in the promotional budget will normally have a
positive effect on sales, but can easily have a negative impact on current profits.
Looking at this conflict from the other direction, short-term profitability can usually
be increased by raising prices and reining back promotional spend, but this will nor-
mally involve some loss of market share.
Second, not only is there a directional conflict, but there is also a timing difference. The
effect of decisions on profits usually occurs much faster than the impact on sales and
market performance. For example, a decision to cut R & D or brand advertising will
immediately boost cash flow and profits, but a negative effect on sales may not occur
for several years. Looking at it the other way, a decision to boost research, advertising
or service takes time before it is implemented, achieves positive recognition in the
market and builds loyalty among customers. There is a delay – often a long delay –
between expenditure and return. When profits come under serious pressure, not sur-
prisingly few managers are willing to initiate longer-term, market-oriented spending
programmes. They know that postponing such investments has a negligible effect on
short-term sales, but a large and immediate positive impact on profits.
The implication of these two conflicts is that management has to choose how they
balance short-term profit goals against long-term competitiveness in the market. If
executives are solely financially oriented, then short-term profits can be quickly
turned around by raising prices, slashing investment and pruning the business back
to its currently profitable core. Unfortunately, over a longer run, such policies destroy
the competitiveness of the company. On the other hand, a purely market orientation
(Figure 13.2) that ignores an inadequate profit performance is equally vulnerable,
especially in a western environment. Box 13.1 describes the problems faced by a well
Market orientation
Management
decisions
Product
Price —
+
Market Profit
performance Services performance
Slow impact — + Fast impact
Promotion
Figure 13.2 Channels

Long-term versus
short-term Financial orientation
orientations
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Box 13.1 NEXT

J Hepworth, a gentleman’s outfitter, was established in Leeds in the UK in 1864. In the 1980s fashions had
changed and the traditional concept was no longer viable and the company purchased an existing retail
chain which they converted into women’s wear stores branded Next. In 1986, it formally changed its name
to NEXT and acquired the mail order company Grattan plc. Grattan, however, was sold on five years later to
German Otto Versand for half the 1986 price.
NEXT was the fashion retailing success of the 1980s. Under George Davies, the company rapidly expanded
its high street presence and made several major acquisitions, transforming itself into a major retailer with a
turnover in excess of £1 billion
In 1987, the company acquired Combined English Stores, a group of jewellery and fashion accessory retail
chains with nearly 900 outlets, including major high street names. In 1988, however, the year after the
takeover, trouble began. The task of integrating so many diverse strands proved to be too much for the
company’s management capacity. NEXT experienced a downfall almost as spectacular as its rise had been.
Eighteen months of rationalisation followed and losses continued into 1991.
This and other economic factors were the cause of a major retrenchment in which many subsidiaries had to
be sold. NEXT went back to concentrating on its core business of NEXT retail and mail order.
This strategy has proved resilient and the company has continued to outperform its rivals up to 2005.
known British company which has seen a series of ups and downs over the last 25
years resulting in a series of major problems.
Turnaround management needs a three-pronged approach to resolving this dilemma.
First, managers need to communicate a convincing, well-thought-out vision of where
the company is heading, which will inspire the stakeholders to take a more sanguine
view of the company’s future. If management can impress with their long-run mar-
keting strategy, then investors’ views of the value of the business will not be
dominated by its current profits travails. Second, management needs to achieve a
realistic balance between the short term and the long term. This is why a consolida-
tion phase is important – to optimise the current businesses and strip out those that
no longer fit the company’s future. The consolidation phase provides time and
resources for implementing the more fundamental changes that are necessary. Third,
management needs to develop a long-term revitalisation plan that is lean on
resources. Successful Japanese companies, in particular, have shown that long-term
success is achieved not by outspending competitors in R & D, marketing or opera-
tions, but by using skills and finance more effectively. Competitive advantage is
achieved by out-thinking not outspending rivals. This way long-term growth does
not necessarily result in an inadequate return on investment.
Types of industry change
Change becomes necessary when a mismatch occurs between the firm and its envi-
ronment. The consolidation phase of the change programme is tactical, focusing on
the financial and operational symptoms of the malaise. The transformation stage is
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Ty p e s o f i n d u s t r y c h a n g e
strategic, dealing with the root causes of the problem. Strategic drift is the term used
to describe an increasing gap between what the market requires and what the organi-
sation is able to offer. Strategic drift is reflected in the company possessing products,
processes or distribution channels that are no longer appropriate to achieve growth
and profitability.
Two types of environmental change that trigger strategic drift can be distinguished.
Evolutionary change occurs relatively slowly and should be predictable by an alert man-
agement. Examples include the drift of low-skill, labour-intensive manufacturing from
high-cost to low-cost countries, the growth of out-of-town retailing and the growing
application of electronics in engineering. Radical change is rapid and discontinuous
change that is far more difficult to anticipate. Examples include dramatic technological
breakthroughs (e.g. Pfizer’s discovery of Viagra), major economic or political changes
(e.g. the attacks of 11 September 2001 and the subsequent military campaigns) and sig-
nificant innovations in the market or distribution channels. With this type of change,
management has to grasp quickly the magnitude of the shift for the company’s future,
and prioritise forging a view about how the business must be transformed.
Faced with strategic drift, management has four options.1
Zero change
This occurs when an organisation’s historic strategy remains essentially constant over
a long period of time. There is no substantial change in its market positioning, prod-
uct portfolio or channels of distribution. In today’s rapidly changing environment,
zero change is always fatal. As Figure 13.3(a) illustrates, what may begin as a small
mismatch with the market grows, through a process of strategic drift, into a disas-
trous strategic gap.
Until the 1990s Marks & Spencer was the world’s most admired retailing group. But
the company failed to adapt to evolutionary change as living standards rose, markets
became increasingly segmented and consumer expectations for greater value and
fashion increased. What began as a small, solvable problem became, through man-
agement’s reluctance to challenge its historic strategy, a gap that brought about a
collapse in the value of the company.
Gradual change
This occurs when the organisation changes incrementally through small, piecemeal
adaptations (Figure 13.3(b)). Some products, markets and channels are changed, while
other core areas remain constant. Most organisations that achieve long-run perform-
ance seek to adapt through a process of gradual change. It is like a process of
experimentation: successful moves are built on; failures are abandoned. Over time, the
accretion of these relatively small moves can be seen as substantial strategic change.
Such a process has many advantages. It builds on the organisation’s expertise and
experience. It is relatively low risk. Managerial flexibility and creativity are encour-
aged. It avoids the trauma and resistance to change that normally occur with
corporate transformation.
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Industry
Market requirements
environment
Strategic gap
Strategy
(a) Zero change

Market requirements Time
Environment
Strategy
(b) Gradual change Time
Environment
Market requirements
Gap
Strategy
Flux
Figure 13.3
Types of adaptive (c) Transformational change Time
change
Flux
This is a period of indecision in which strategies change but in no clear direction. It is
common where a substantial strategic gap has emerged and management is uncertain
how to close it. Experiments might include new ventures to copy industry innovators
or acquisitions seeking out new market opportunities. One danger in this period is
responding too little, too late. The opposite danger is gambling on a major investment
in which the company lacks the core capabilities or industry foresight to succeed.
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Some financial concepts
Transformational change
This occurs when management radically changes its view of opportunities in the
industry and aggressively develops the new processes, products, channels and market
positioning to capitalise on the new scenario. Transformational change involves
acquiring new competences and resources, re-energising the workforce to embrace
the new direction enthusiastically, and the substantial reconfiguration of the business
and its network of suppliers and distribution partners.
Transformational change may become necessary when there is a radical change in
the company’s environment. More commonly, it becomes necessary when manage-
ment fails to respond over a long period to evolutionary changes (see Figure 13.3(c)).
The strategic gap then becomes too great to be closed by gradual change. Since 2000
many major companies have sought to produce transformational change to break
their downward spiral. These include Philips, British Airways, AEG and IBM. All saw
tough consolidation stages with huge reductions in workforces and major disinvest-
ments, followed by efforts to re-energise the organisation and culture, acquire new
skills and set a new marketing direction.
Such a change is the focus of this chapter. Transformational change is difficult to
initiate and even more difficult to sustain. It normally requires management to intro-
duce initially a fairly ruthless programme of consolidation. For example, British
Airways cut 12.5 per cent of its workforce in 2001 and has reduced it by a further
10 per cent in the following four years, Philips and IBM lost similar numbers of jobs.
Consolidation needs to be followed by a change in gear with top management paint-
ing a convincing and enthusiastic vision of the transformed company leading a
much-changed industry. It also involves the patient build-up of new competences
and the accomplishment of intermediate challenges that act as milestones marking
the company’s progress. Finally, it requires top management to possess the persuasive
ability to overcome the barriers to change that inevitably exist at all levels of the
organisation, and which represent the biggest threat to successful transformation.
One example of transformational change is the development of Skoda by
Volkswagen, which took it from a brand perceived as being without attraction or
merit to a desirable value alternative to VW over a period of some 15 years.
When an organisation is in serious trouble, the first stage of the turnaround is usually
consolidation – halting the financial deterioration. To see how this is done, it is
useful to present some basic financial concepts. Analysing financial reports is unnec-
essarily complicated because accountants use different terms to describe the same
concept; they use different methods and styles to present accounts, and employ dif-
ferent ratios and criteria to assess financial performance. However, with familiarity
most of these problems do not cause too much difficulty. Deeper dilemmas lie in the
valuation of financial assets and profits in a changing environment, the way account-
ants allocate costs and the ‘window dressing’ that companies often employ to make
their accounts look more appealing to investors.2
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The three key financial accounts are the income statement (or profit and loss
account), the balance sheet and the cash flow statement. The income statement and
balance sheet for Chemco are summarised in Table 13.1. The balance sheet shows, on
the left side, the financial assets used to generate the company’s sales and create
value for customers: the year-end value of its plant and equipment, stocks, credit out-
standing to customers, etc. The right side shows how these value-creating assets are
financed: via short- and long-term borrowings and through equity or shareholder
funds invested in the company. The income statement (or P & L account) shows how
much profit was obtained from the sales produced over the year after all costs and
expenses were deducted.
Objectives
Developing a financial plan for a company has two components: objectives and strat-
egy. The most obvious financial objective is profit. Here Chemco has a net profit
(before tax) of €13 million. But to compare and evaluate businesses of different sizes
and characteristics, profits need to be analysed in a relative way. A commonly used
ratio for doing this is return on sales (ROS) – net profit divided by sales, which is 3.9
per cent (i.e. 13 ÷ 330). This figure is useful for comparing businesses that are differ-
ent in size but similar in structure, but if companies require very different levels of
investment it is less meaningful. Hence return on investment (ROI) is the most
common approach to looking at financial performance – a ratio that compares profit
Table 13.1
Profit and loss account €m
Chemco plc
accounts
Sales 330
Variable costs 235
––––
Contribution 95
Fixed costs
Manufacturing 28
Selling and administration 53
––––
Operating profit 14
––––
Net interest payable 1
––––
Net profit before tax 13
––––
Balance sheet €m €m
Current assets 200 Current liabilities 105

Stocks 80 Long-term debt 55
Debtors 70
Other 50 Equity 150
Fixed assets 110
–––– ––––
Total assets 310 Total liabilities 310
–––– ––––
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with the amount of investment required to generate the profit. There are three ways
of defining investment and hence ROI:
Net profit
1. Return on equity (ROE) = ––––––––––
Equity
This ROE figure is the most relevant measure for shareholders, since equity (share
capital and reserves) represents their most obvious stake.
Net profit
2. Return on assets (ROA) = ––––––––––––
Total assets
ROA is relevant for the manager since an adequate return is expected on all the funds
invested in the business, whether provided by shareholders or borrowed from creditors.
Net profit
3. Return on capital employed (ROCE) = ––––––––––
Net assets
Capital employed or net assets consists of fixed assets plus net current assets (i.e. cur-
rent assets less current liabilities). Looking at the balance sheet, it can be seen that net
assets is identical to equity plus long-term debt. Accountants often see capital employed
as the best indicator of the amount of capital or assets employed in the business.
For Chemco these ratios are respectively: ROE = 8.7%, ROA = 4.2% and ROCE = 6.3%.
It should be emphasised that accountants have many slightly different variations of
these ratios. Some will use operating profit rather than net profit, especially when cal-
culating ROS, ROA and ROCE. Often tax is deducted from net profit to calculate ROE.
Also, rather than using year-end investment figures, some accountants calculate the
average invested during the year, or even compare profit this year with last year’s
investment. While these variations produce different numbers, fortunately they do
not in any way change the operational implications for management. They do not
affect what managers should do to improve profitability.
Another important term is the gearing ratio, defined here as:
Total liabilities + Equity

Gearing ratio (GR) = ––––––––––––––––––––––––
Equity
Total assets
= ––––––––––––
Equity
For Chemco this is 2.1. The higher the GR, the greater the proportion of the assets
that are financed by debt rather than shareholder funds.
Finally, we can introduce asset turnover:
Sales
Asset turnover (AT) = ––––––––––––
Total assets
which for Chemco is 1.06. This measures the effectiveness with which sales are gener-
ated from the company’s assets. The greater the AT, the more sales are generated by
the company’s assets. Using these ratios, three important financial identities can be
generated (the illustrative figures for Chemco are shown below the identities):
ROE = ROA × GR
8.7% = 4.2% × 2.1
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This equation shows how, in good times, high gearing can give shareholders spectac-
ular returns, by multiplying up the return on assets. However, in bad times, the need
to meet high interest payments and possibly repay debt can put the whole company
at risk.
The second equation dichotomises the task of the manager in improving return on
assets into two sets of activities:
ROA = ROS × AT
4.2% = 3.9% × 1.06
In other words, the manager can improve performance by achieving either a higher
return on sales or higher asset turnover. ROS is increased by obtaining higher prices,
more sales or lower costs. AT is increased by raising sales or cutting the level of cur-
rent and fixed assets employed in the business.
Putting these two equations together gives the basic financial planning equation, which
identifies the central financial objective (ROE) and the three dimensions of strategy
that are required to achieve it:
ROE = ROS × AT × GR
8.7% = 3.9% × 1.06 × 2.1
It is commonly argued that the basic goal of a capitalist enterprise, if it is to survive,
has to be achieving a satisfactory return on shareholder funds, i.e. ROE. The last
equation shows that there are three, and only three, ways of achieving this. For
example, comparing Chemco’s ROE with other companies would show that 8.7 per
cent is a very poor return. To improve this, management has to raise ROS, AT or GR,
or some combination of these. The next section will show how this is done. The basic
financial planning equation also interprets how the enterprise generates results. For
example, for Chemco it reveals that, on average, for every €1 shareholders invest in
the business, Chemco obtained €2.10 of assets; every €1 of its assets generated €1.06
of sales, and every €1 of sales generated 3.9 cents profit. The objective of an efficient
management team is to make these numbers bigger. This is especially the case in the
consolidation phase when the ratios are in, or moving towards, unsatisfactory levels.
Consolidation phase
A successful turnaround requires two types of decision: operational and strategic.

Operational decisions are concerned with making the best use of resources to optimise
the current business. These are essentially internal, about deploying the firm’s finan-
cial and physical resources more profitably. Strategic decisions are concerned with
deciding which markets, products and channels represent the best future for the
company. Such decisions are primarily external: they are about seeking to foresee the
emerging opportunities being created by changes in the environment, and choosing
in which of these the company has the best potential competences to build competi-
tive advantage.
The consolidation phase of the turnaround focuses on operational decisions, but it is
crucial that these do not undermine the strategic task of transformation. This can
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Consolidation phase
easily happen because consolidation requires substantial disinvestment of yester-

day’s businesses. By contrast, transformation requires investment in tomorrow’s
businesses. Operational and strategic decisions need to be pursued in parallel. First,
consolidation without a strategy for transformation is highly demoralising for staff.
Without the promise of a more successful future, the company will find its best
managers drifting away, often to competition. Second, a strategic plan is necessary
to ensure that cutbacks in the consolidation phase do not hit areas vital to the com-
pany’s future. Hasty disposals of businesses or R & D skills where the company has
core competences can prove extremely costly mistakes. Third, looking at both
together also stimulates management to consider the conflicts between short-term
profit and long-term market performance.
Selecting a focus
The basic financial planning equation ROE = ROS × AT × GR provides a powerful
framework for improving profitability and cash flow. Applying this systematically has
a number of advantages. First, it ensures that management considers all the impor-
tant profit levers. Second, by providing a clear path it allows the task to be done
quickly. Third, because it is relatively simple it means that the chief executive can
delegate to lower-level managers key areas for improvement. The system provides the
less experienced manager with clear guidelines for analysis and action.
There are many levers for improving profitability and cash flow. The ones that should
be the primary focus depend upon several factors:
■ Speed. Some profit levers work much faster than others. How urgent is the profit
improvement requirement? For example, new products improve profits, but develop-
ing them can take years. By contrast, a price increase can offer very speedy results.
■ Customer reaction. Some financial levers can be negated by market responses. For
example, price increases are likely to lose market share, whereas cost reductions are
not. It is important for managers therefore to estimate the relevant demand elasticities.
■ Competitor reaction. Efforts to increase volume are likely to produce a competitor
response, especially in mature markets. Therefore, a head-on strategy to increase
market share could be counterproductive.
■ Upside potential. Managers should generally focus on where the biggest numbers
occur. For example, a food retailer has high variable costs and low fixed costs; a
pharmaceutical company’s cost structure is the reverse. Therefore, in the former
management may well see greater upside focusing on cutting variable costs,
whereas in pharmaceuticals fixed costs are the key.
■ Downside risk. Some turnaround tactics carry higher risks. For example, investing
€1 million on an advertising campaign to boost volume is fine if it works, but if
the expenditure does not achieve the results expected, profits will be worse than
before. Cost-cutting and asset reduction strategies, by contrast, usually carry little
downside risk.
■ Long-term damage. Cutting R & D and disposing of key assets can impose disguised
but deep long-term costs. For example, in the 1970s Motorola was forced to sell its
loss-making television business to Matsushita. Subsequently, it discovered that its
loss of core competences in video display technologies was handicapping many of
its potential areas for growth.
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■ Legal and environmental constraints. A company’s options may be constrained by

laws and regulations. For example, in ethical pharmaceuticals, prices are often reg-
ulated. In Italy and Germany it is very difficult for companies to lay off workers.
■ Morale. Cutting staff and closing factories generally have a very negative effect on
motivation and morale. In contrast, cutting variable costs, which transfers the
pain to the suppliers, usually gains more support.
Two examples
These techniques and constraints can be illustrated with Chemco (Table 13.1), a
struggling industrial chemicals company, and Pharmco (Table 13.2), a highly prof-
itable ethical pharmaceutical company. Chemco’s problems are that new products
and aggressive competition have already eroded its market share and margins.
Strategic drift has occurred as the company has failed to adapt to changes in its
market environment. Pharmco’s problem is different. Here management is more
dynamic: it anticipates a deteriorating market environment and wishes to prevent a
future erosion of the company’s profit and growth performance. Specifically, changes
in the health care market led Pharmco’s management to anticipate a 10 per cent
decline in both volume and prices over the next five years. Table 13.2 shows that, if
management does not respond to these threats, profits will collapse from €96 million
to €20 million. If the erosion of volume and prices cannot be halted, then Pharmco
will need a 25 per cent across-the-board cut in costs to maintain profits. If the com-
pany wants to maintain its level of R & D spend, the other costs would have to be cut
by 30 per cent. Clearly the threats it faces are very serious. Pharmco needs a consoli-
dation strategy to limit the short-term damage and a longer-term transformation
strategy to find new areas for growth and profit margin enhancement.
Table 13.2
Current Predicted Change
Pharmco plc: impact year (€m) required
of a predicted
decline in prices and Sales 400 320 320
volume Variable costs 44 40 30
––––––––––––––––––––––––––––––––––––––––––
Contribution 356 280 290
Fixed costs
Manufacturing 44 44 33
Selling and administration 164 164 122
Research and development 52 52 39
––––––––––––––––––––––––––––––––––––––––––
Net profit 96 20 96
––––––––––––––––––––––––––––––––––––––––––
Faced with a predicted 10% decline in both volume and prices:

● 25% across-the-board cost cuts needed to restore profits
● 30% cost cuts needed to maintain R & D spending
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Consolidation phase
Improving ROS
A turnaround management team must set new, satisfactory targets for return on
investment, return on sales, asset turnover and gearing. These targets should be based
upon benchmarking against high-performing companies in the sector. Management
needs to set clear dates and intermediate goals by which progress towards the targets
are measured.
Of the three components of the basic financial planning equation, return on sales is
usually the one that sees the biggest decline when a business runs into trouble. This
therefore is normally the major focus of attention in a turnaround situation. There
are six ways to improve return on sales in any company.
Cutting fixed costs

These are the costs that do not vary directly with volume and include indirect labour,
management salaries, most of the selling and marketing expenses, administration,
research and development, depreciation, heat and light, etc. Cuts here should be tar-
geted to accelerate the long-term transformation process. Management should have
first completed a portfolio analysis to identify the future core of the business. It
should also have thought through the type of culture it wants to create. Cutting
bureaucracy, better systems, rationalising facilities and eliminating non-value-adding
work will further the transformation strategy and allow substantial savings in fixed
costs. Even small cuts can have big effects on improving the return on sales. As Table
13.3 illustrates, a 5 per cent cut in fixed costs would raise net profit by over €4 mil-
lion or 31 per cent at Chemco. Looking at Pharmco, for the predicted year where
profits are set to fall to €20 million (Table 13.2), a 5 per cent cut in fixed costs would
give €13 million or a 65 per cent profit improvement. Redundancy costs need to be
considered, but taking out overhead costs can in practice go a long way to restoring
profits to reasonable levels.
Cutting variable costs

These are costs that vary directly and proportionately with volume. Examples are
materials, direct labour, lubricants, power and supplies. A thorough analysis of the
supply chain can normally lead to significant opportunities to reduce variable costs.
This may involve switching to lower-cost sources, value analysis, reducing the
number of suppliers, and centralising and more effectively negotiating over prices.
For Chemco, where variable costs are a high proportion of total cost, the leverage of
small cuts is great: a 5 per cent cut would boost profits by 90 per cent. For Pharmco,
where variable costs are a small proportion, the leverage for cutting variable costs is
Table 13.3
Chemco Pharmco
Effects of 5 per cent Variable €m % €m %
changes on
profitability Fixed costs 4.05 31 13.00 65
Variable costs 11.75 90 2.00 10
Volume 4.75 37 14.00 70
Price (elasticity = 0) 16.50 127 16.00 80
Price (elasticity = 1) 10.90 84 1.20 6
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much smaller. In poorly run businesses, variable cost reduction is generally a major
source of potential profit improvement.
Raising volume
Sales people generally believe that increasing sales is the way to solve the company’s
profit problems. A 5 per cent volume increase would raise profits by 37 per cent at
Chemco and 70 per cent at Pharmco. The problem is: how would volume be
increased without spending more on promotion or cutting prices? For example, at
Chemco if prices were cut by as little as 2 per cent to achieve the 5 per cent boost in
volume, it can be calculated (from Table 13.1) that profits would actually fall by 17
per cent. Especially in mature markets, management should be extremely cautious
about volume strategies to boost short-term profits. Such policies can easily backfire.
Volume is best thought of as a longer-term strategy based upon finding new market
segments and developing products, services and distribution systems that offer real
competitive advantages. If the company’s offer does not possess any such advantage,
then seeking to expand volume in current segments is likely to erode margins rather
than increase them.
Raising prices
Potentially at least, higher prices always have the greatest leverage on profits. Perhaps
surprisingly, in practice there is very often room for small price increases and such
increases can have an enormous effect on the bottom line. For example, at Chemco a
5 per cent price increase would improve profits by €16.5 million if volume remained
the same. If the elasticity is 1 (i.e. a 5 per cent price increase leads to a 5 per cent
volume drop), profits still increase by €10.9 million (84 per cent). Note, however, that
this depends upon the cost structure. If variable costs are low, as at Pharmco, the loss
of volume greatly reduces the advantage of the price increase if demand is price elas-
tic. But certainly in mature industries, where contribution margins are typically low,
better margins are generally the key to consolidating profits.
How can marginal price increases be obtained? Often the greatest pressure against
raising prices comes not from customers, but from the firm’s own sales department.
Salespeople invariably oppose price increases, since they believe it will make their
own jobs more difficult. Generally, dealing with this problem requires basic commer-
cial training that educates sales staff on the economics of business, and in particular
on how price is the central determinant of return on investment. Price or gross
margin attainment also needs to be structured into the incentive scheme to orient
staff to achieve results on these dimensions. Good marketing training is also neces-
sary to teach the basics of selling on value rather than price, market segmentation,
creating and sustaining relationships and effective negotiating techniques. Marketing
management also needs to update the product line and how it is presented to cus-
tomers. While customers resist price increases on current products, they are often
willing to negotiate when the products or services appear new and improved.
It is also important to look at the discounts the firm is giving. In a report, McKinsey
emphasised the dangers of businesses focusing on its list prices. Typically the price
the company actually receives is 23 per cent less than the published list price. The
difference disappears in numerous discounts for early payment, volume bonus, co-
promotions, etc. Yet management often has a very poor understanding of these
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Consolidation phase
discounts: where they occur and whether they offer perceived value to customers.3
Tying incentives for management and the sales team to realised prices will encourage
them to focus on the most profitable customers and the importance of demonstrat-
ing value rather than selling on price.
Improving the customer mix

All suppliers face segmented markets. Companies vary in the volumes they purchase
and in their sensitivities to price. As a result, some customers are much more prof-
itable than others. Exploiting such differences is often the key to substantial
short-term improvements in volumes and profitability. For example, a leading Paris
department store found that Japanese tourists spent on average three times as much
as Americans. By shifting its advertising and promotional budget towards Japanese
visitors, it was able to improve profits significantly.
In both consumer and industrial markets, an identical product will typically have a
price spread of over 80 per cent from the least to the most price-sensitive accounts.
For example, while the average price the firm receives is €10, some aggressive cus-
tomers will be paying only €7, while less price-sensitive accounts will be paying up to
€13. Thus, while the average gross margin might be 30 per cent, the spread could be
between 0 and 46 per cent. A segmented approach to pricing is crucial. In practice, it
is virtually impossible to raise prices by 5 per cent to all customers (i.e. the most
price-sensitive customers would be alienated and the business lost altogether). But it
is often not difficult to raise the price to some accounts by 10 or 20 per cent. In other
words, any price increase should be seen as an average achieved from a segmented
strategy. For example, if Chemco could get one-third of its customers to take a 6 per
cent price increase, then its net profit would rise by over 50 per cent from €13 million
to €19.6 million (from Table 13.1). To deploy a segmented pricing strategy, managers
need a three-stage approach. First, they should analyse all their accounts and judge
their price sensitivities. Which customers could stand a price increase? What could
we offer to make such an increase acceptable? Second, marketing and sales should
target customers at the high end of the price band for increased volume. Third, the
clients in the bottom 20 per cent of the price band should be marked for action that
will result in either improved price levels or their termination as customers.
Improving the product mix

Recognising differences among customers is important, but there may be upper limits
to its use. Wide price variations for the same product may not be sustainable if the
differences are visible to customers paying the higher prices. One obvious solution is
to introduce multiple brands so that customers can be encouraged to trade up to
superior products. For example, most suppliers of both product and services offer
deluxe and cheaper standard models of their brands. Such product differentiation
supports and enhances a company’s ability to price discriminate among customers.
More generally, unless a company renews its product line, its prices will be under
continuous pressure. Customers normally expect real prices to fall, and industry
supply and demand conditions usually ensure that this occurs. The only way to
maintain prices and margins in the longer run is to change and innovate continually
with the aim of offering customers higher perceived value.
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The results of the planned improvement in return on sales are summarised in Figure
13.4 for Chemco. As a result of the consolidation programme, the profit margin
increases from 3.9 to 12.7 per cent and net profits more than treble. This is achieved
by a 5 per cent average price increase and a 5 per cent decline in variable and fixed
costs. Units sold drop by 5 per cent, but the price increase holds revenue in money
terms to around the same figure.
Improving asset turnover

The second component of the basic financial planning equation is asset turnover or the
ratio of net sales to total assets. When multiplied by the ROS, the AT ratio gives the
firm’s return on assets. By planning and controlling AT, the management can improve
return on assets and return on equity. AT can be increased by raising sales in relation to
assets or reducing assets in relation to sales. Again managers need to set targets. For
example, the goal at Chemco might be to increase AT from the current 1.06 to 1.2.
Other things being equal, this would increase return on investment by over 13 per cent.
Assets are divided into current and fixed. It is usually best to focus initially on current
assets for two reasons. First, unlike fixed assets, current assets can be changed rela-
tively easily in the short run. Second, for many businesses, current assets are the
largest share of assets and therefore represent the greatest potential for improvement.
The three major components of current assets are normally stock, debtors and cash.
Stocks can be cut back by better forecasting of sales and encouraging suppliers to
offer an effective just-in-time delivery system. In practice, stocks tend to be particu-
larly excessive in slow-selling lines, so a rebalancing exercise is usually fruitful. For
companies that have been loosely managed in the past, there is generally the
Unit price
1.00
Net sales 1.05
£330m
×
Gross margin £330m
Unit volume
£95m
Profit Cost of 330
£120m goods sold
£13m 314
Profit margin £235m ×
£42m
3.9% £210m Unit cost
Net sales 0.71
12.7%
£330m Variable
0.67
expenses
£330m
Total £28m
expenses £27m
£82m +
Key Fixed expenses
£78m
Current £54m
Figure 13.4
Target £51m
Chemco: return on
sales model
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Consolidation phase
opportunity to reduce stocks by eliminating fringe sizes, duplicate brands and per-
haps some price lines. At Chemco such activities would be expected to produce
savings of around €10 million in average investment in stocks.
Better management of debtors should also quickly improve the rate of asset turnover.
Many companies have poorly organised collection programmes. Management should
set up a high-level team to achieve targeted improvements. For example, Chemco
sells primarily on a 30-day account, but in practice the average account is 45 days. An
organised collection programme should be able to bring this down to around 36
days, which would result in savings of about €12 million in average investment in
debtors. Cash is another costly investment to have if it is underutilised. Again, tar-
geted reductions in cash should produce important economies.
Turning to fixed assets, the major items will be plant, equipment, land, buildings and
investments. Here the options are selling off surplus assets, disposing of poor-performing
subsidiaries, consolidating manufacturing on one site, outsourcing, and sale and lease-
back of high-value assets. Reducing fixed assets will normally also cut overhead costs,
bringing a double benefit. The difficulties with fixed asset rationalisations are several.
First, they take longer than with current assets. Second, there are various types of exit
barrier. These include redundancy costs, difficulties in finding buyers for specialised
assets, interrelatedness with other products and markets that the firm wishes to main-
tain (e.g. shared production facilities or salesforces), emotional attachments and
government and social barriers to exit. Third, such fundamental restructuring is very
dangerous without management first having a clear plan of where it wants to be in the
future. It does not want to dispose of assets and capabilities that it will subsequently
discover are vital to its long-run transformation strategy.
Nevertheless controlling fixed assets is crucial to any consolidation programme. If
fixed assets could be cut by 15 per cent at Chemco over a two-year period, this would
save €16 million, which together with current asset savings of, say, €30 million would
raise asset turnover from 1.06 to 1.25 or 18 per cent (Figure 13.5).
Net sales
£330m
£330m
Stocks
£80m
Asset turnover £70m
1.06
1.25 Current assets Creditors
£200m £70m
£170m £60m
Total assets
Other current
£310m assets
£264m £50m
Key Fixed assets
£40m
Current levels £110m
Figure 13.5 Target levels £94m
Chemco: asset
turnover model
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Improving gearing
Return on assets (ROA = ROS × AT) is a measure of management’s financial perform-
ance, but it does not measure adequately the financial performance of the firm. In the
private enterprise system, the owner’s viewpoint of financial performance is seen as
primary. The key measure here is return on equity. The link between ROA and ROE is
the gearing ratio. A higher gearing (i.e. more debt) allows shareholders to lever
upwards the assets they control and the returns they receive. When a firm has excit-
ing opportunities to profit, gearing allows the owners to obtain more assets and to
appropriate the profits that are left after the due interest is paid to the creditors.
The firm has two types of debt available to it: short (due for repayment within one
year) and longer term. Short-term debt usually consists of amounts owing to suppli-
ers and the bank overdraft. Longer-term debt is negotiated loans from banks and
other financial institutions. Higher gearing increases risks both to the firm and to the
creditors. Debt levels much beyond the norm for the sector become difficult and
expensive to increase. With a gearing ratio of over 2, Chemco would find it increas-
ingly difficult to raise this further.
Higher leverage is encouraged by periods of rising sales and low interest rates. But
when a company is in difficulty, when there is a recession or when interest rates are
high, creditors become very nervous about their funds due from companies with
high gearing.
To summarise for Chemco, the actions proposed should increase return on equity
from below 9 per cent to 33 per cent and return on assets from 4 per cent to 16 per
cent. This would result from a trebling in the ROS and an increase in AT. The GR
would not be expected to increase. Most of the substantial improvement would come
from the higher ROS achieved by a 5 per cent average price increase spread tactically
across customers and products according to price sensitivities. There would also be a
5 per cent cut in costs achieved through rationalisation. The calculation allows for 5
per cent fall in volume. The results in summary are as follows:
ROE = ROS × AT = GR
8.7 = 3.9 × 1.06 × 2.1 Before
33.3 = 12.7 × 1.25 × 2.1 After
Finally, the impact of the consolidation plan is shown on Chemco’s cash flow state-
ment (Table 13.4). Net cash flow is boosted from €5 million to €39 million annually.
The major source of this improvement is the increase in net profit, but this is sup-
ported by the disposal of surplus assets and a reduction in both capital expenditure
and working capital requirements. Net cash flow as a percentage of sales increases
from 1.5 per cent to 11.8 per cent, representing a healthy surplus to satisfy sharehold-
ers and provide reasons for the revitalisation programme that will create shareholder
value in the future.
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Tr a n s f o r m a t i o n p r o g r a m m e
Table 13.4
Current (€m) Target
Chemco: cash flow
statement
Net profit 13 42
Tax (5) (16)
Depreciation 8 8
Trading cash flow 16 34
Capital expenditure (10) (2)
Change in working capital (1) 6
Operating cash flow 5 38
Fixed asset disposals 0 4
Reorganisation costs 0 (3)
––––– –––––
Net cash flow 5 39
––––– –––––
NCF/Sales (%) 1.5 11.8
Transformation programme
The consolidation phase is usually a necessary part of the turnaround process, but it
is never sufficient because it focuses on the symptoms of the problem rather than its
true causes. At most it can temporarily halt the company’s downward spiral, giving
management two or three years’ breathing space to develop and implement the blue-
print for transformation.
Figure 13.6 contrasts the consolidation and the transformation stages of the turn-
around. Consolidation can only produce short-term gains because it does not tackle
the root causes of the company’s declining competitiveness. It is a simple operation
Performance
Differences Consolidation Transformation
Effects: Short term Long term

Focus: Financial resources People and capabilities
Difficulty: Simple, quick Complex, slow
Orientation: Internal External
Task: Denominator Numerator
Decisions: Operational Strategic
Emphasis: Cut costs, investments Growth, share
Figure 13.6 Rationalise assets Innovate, brands
Contrasting Efficiency Effectiveness
consolidation and Morale: Negative Positive
transformation
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in denominator management: cutting inputs (costs, expenses and assets) in the

output/input productivity formula. It is home ground for accountants because it is
entirely inward, focused on the company’s internal financial resources, costs, margins
and assets.
By contrast, transformation is about long-run competitiveness in the market. It
focuses on acquiring the core competences and remotivating the staff to achieve
industry leadership. It is slower and more difficult than consolidation because the
challenges are external. Essentially it is about being better than competitors and win-
ning the hearts and minds of customers. In today’s international markets it means
becoming a ‘world-class’ company. Decisions are about outputs rather than inputs:
building market share, positioning brands and stimulating innovation in products,
processes and marketing channels. It is definitely not the forte of accountants.
More generally, the skills required for transforming a company’s competitive position
are quite different from those of consolidation. Few chief executives have the ability
to make the switch between the consolidation and transformation stages, between
the internal and external focus, from denominator to numerator management, from
emphasising parsimony to communicating and inspiring vision. When the chief
executive cannot make the transition, the company becomes immobilised in the con-
solidation phase, the fundamental causes of strategic drift are not tackled and
continual cutbacks are required in a vain struggle to disguise the effects of declining
market share and rapidly eroding competitiveness. To prevent this, a key task of the
board of directors is to ask, during the latter stages of the consolidation phase: does
the chief executive have the skills to carry us forward to the next stage?
To create a blueprint for the transformation, the chief executive and the team need to
find answers to five questions:
■ What are the key external forces transforming our industry?
■ What is our vision for achieving industry leadership – what will be our differential
advantage, core competences and new channels of distribution?
■ How will we build the core competences necessary to achieve our vision of world-
class competitiveness?
■ What strategies must be developed to implement the vision?
■ What are the leadership qualities required from top management spearheading the
transformation process?
Anticipating industry evolution

Strategic drift is caused by the organisation’s failure to adapt to changed industry
conditions. To be successful in the future requires the organisation to adapt, not to
today’s markets and technology, but to tomorrow’s. The changing environment cre-
ates both new customer requirements and the new technological possibilities for
meeting them. If the company does not adapt, it is replaced by new competitors that
better match the requirements of the new industry environment.
Companies such as GE, Merck and Procter & Gamble that have maintained a match
to the changing environment do not depend upon luck or random innovations;
instead they plan systematically for innovation. They recognise that few of today’s
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really profitable innovative products created change; rather they responded to obvi-
ous environmental changes already taking place. The success of Unilever’s
cholesterol-lowering spreads or of diet Coke were the result of effectively responding
to the obvious demand for healthier eating and drinking. Peter Drucker accurately
captured this when he defined the entrepreneurial organisation as one that ‘searches
for change, responds to it and exploits it as an opportunity’.4 In most of today’s rap-
idly changing industries, once a firm ceases to be entrepreneurial, it quickly loses the
ability to compete.
Transformation requires recapturing this entrepreneurial drive. To kick-start this, the
chief executive needs to set up a sequence of high-level, cross-functional taskforces
whose objective is to analyse and project changes in the industry. The objectives of
this process are to question comprehensively how the firm’s markets will differ in the
future, and what the key discontinuities will be in customer behaviour, technology,
distribution channels, competition and products. This is not a quick and straightfor-
ward process. The results will provide the intellectual basis and psychological trigger
for the whole transformation process. They are the elements on which top manage-
ment will create a vision of what the revitalised company will be like, what
accomplishments it will seek over the coming years, the core capabilities it will aim
to build, and the strategies it will follow.
The review should consider at least the following areas:
■ Market and customers. A taskforce needs to evaluate the key changes taking place
in the company’s markets: how customers and their expectations are changing.
Areas to explore include the strengths and weaknesses of the company’s position,
the emergence of new market segments, changing customer buying patterns and
potential new distribution channels.
■ Industry and competition. Key competitors need to be identified and analysed. What
are their strengths and weaknesses, opportunities and threats? Can new competi-
tors be expected to enter the market? If so, who are they and how should we
prepare to respond? What is the trend and structure of the industry? Is it becom-
ing more concentrated? What are the trends in backward and forward integration?
How will these affect the business? Are competitors involved in strategic alliances
that could be threatening? Does the trend of outsourcing or facilities management
offer potential new customers or competitors?
■ Technology. How aware is the organisation of technological developments likely to
shape the industry in the future? Does the company have any partnerships with
customers, suppliers and other firms to advance its technological capabilities? Do
other technologies threaten our existing skill base? How up to date are we in terms
of product and process technologies? Have we benchmarked our technological
capabilities against the emerging competitors?
■ Suppliers. A taskforce should review the opportunities for closer partnerships with
suppliers to accelerate change. It needs to check into new sources, options and
partnerships, particularly in the newly industrialised countries. The advantages of
contracting out non-core activities also should be evaluated. The risks and threats
attached to current suppliers need to be considered. Alternative sources of finance
for the business’s future development can also be explored.
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■ Demographic and economic changes. A major source of opportunity is created by

demographic, economic and consequential changes in lifestyles. Which markets
are likely to offer the highest growth potential? How will movements in costs
affect location decisions in the industry? How will changes in the European Union
and other economic zones affect the industry? How are changes in lifestyles likely
to influence buying decisions?
■ Political, legal and environmental. What new laws or directives might affect the
industry in the future? How are environmental issues shaping current market
demands? How do we rate in our environmental performance?
■ Staff and skills. Another taskforce needs to evaluate the company’s human
resources. Are the people working for the organisation motivated and committed?
How close to best practice are we in meeting the financial and other employment
expectations of staff? What is their level of education, training, skills and qualifica-
tions? How do we compare with competitors? How do we compare in productivity
and unit labour costs?
Developing the vision

This detailed review of the forces transforming the external environment should
provide management with a perspective of the future. Of course, this will not be a
detailed set of predictions: today, the levels of uncertainty are too great for that. It
should, however, lead to a common view of the major trends in demand, competi-
tion and technology.
Management then need to formulate a vision of what the organisation needs to
achieve to be a winner in this new environment. This vision will reflect the results
of the projections made of the environment and be constrained by the perception of
the organisation’s own capabilities. The vision is likely to cover three areas. First,
management will want to define the target markets it will seek to serve in the future.
It will need to take a view of which customers represent the most attractive opportu-
nities. Second, it will need to decide how it is going to gain competitive advantage.
Casio, for example, decided on miniaturisation; TNT Express on speed and reliabil-
ity; GSK on innovative health care products. Third, management will need to be
clear about which core capabilities they will require to create and sustain such com-
petitive advantage.
For example, Hamel and Prahalad describe how in the mid-1990s Electronic Data
Systems, the leading IT specialist, felt the need to redefine its business to maintain
industry leadership. It recognised that new competition and rapid environmental
change threatened, as it did for all successful companies, the viability of current
strategies. EDS first created teams to forecast the major discontinuities likely to occur
in the industry. This led to a new vision which the company termed ‘globalise, infor-
mationalise and individualise’. It defined its primary customers as individuals and
businesses that would want its key IT skills. EDS redefined its competitive advantage
as being first and fastest to provide the new information services and products that
would be the markets of the future. To do this it identified new core competences
that it must acquire. These included genetic re-engineering, high-level strategic con-
sulting skills, digital media and retail expertise.5
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Building core competences

To have the capability to offer customers products and services that are superior to
those of competitors requires the organisation to possess unique core competences. It
must have specialised skills that are difficult for competitors to copy. Such compe-
tences are usually built up over generations. They consist of knowledge and routines
created from longstanding relationships among the organisation’s employees, suppli-
ers, customers and other firms engaged in related activities. These core competences
or ‘organisational architecture’6 allow the firm to respond flexibly to a changing envi-
ronment and to achieve easy and open exchange of information.
Toyota, McKinsey, Pepsi Co., Citigroup and GE are examples of companies possessing
such architecture. Companies in a turnaround situation need to build these capabili-
ties. The problem is that the architecture cannot be built quickly; it can take a decade
to create and consolidate these networks of knowledge. Companies that come, appar-
ently from nowhere, to exhibit explosive growth in sales and profits rarely have
staying power. They are usually shooting-stars, fuelled by windfall opportunities and
gambles that beat the odds. Unless the company has built the networks of knowledge
and trust, it will not be able to maintain the momentum once the windfalls are spent
out and new opportunities have to be created.
All organisations have knowledge and skills, but for these to be valuable core compe-
tences for the future, they must meet three tests. First, they must enable the firm to offer
benefits that customers will value. For example, GSK has a strong salesforce that is
important to its sales process. But it is not a core competence because doctors do not pre-
scribe GSK products because of its salesforce. Its real core competence is its R & D skills.
Second, to be a core competence, the skills must be unique. If competitors have similar
skills then the competence may be necessary, but it does not provide the basis of a com-
petitive advantage. Third, the skills must provide access to new markets in the future.
Managers must avoid defining their skills in terms of the specific product. Specific prod-
ucts generally become obsolete as technology progresses and needs change.
Management’s perception of the future and vision will highlight what new core compe-
tences the organisation needs to build. Hamel and Prahalad adapted the familiar Ansoff
matrix to propose a competence–market model for identifying what new competences
a business has to find (Figure 13.7). This identifies four types of opportunity:7
■ Fill in the blanks. These are opportunities for new products in the company’s exist-
ing markets that can be created from better utilisation of the organisation’s current
competences. Generally these competences have to be imported from another of
the company’s business units. For example, Burmah Castrol used the skills in
brand building possessed by its auto lubricants business to create new branding
opportunities in its speciality chemicals business. These opportunities are created
by opening up the flow of ideas between business units. Because they are based
upon current competences and the firm’s existing markets, they are often the easi-
est and least risky opportunities to exploit.
■ Premier plus ten. These are the new core competences that a business will need to
build if it is to remain a leader in its current market for the future. For example,
the pharmaceutical company AstraZeneca has been focusing on developing disease
management consultancy skills because it believes that future national health
services will not just demand drug products, but wish to find partners that will
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Market
Existing New
Premier plus ten Mega-opportunities

What new core What new core
New competences will we competences are
need in our current needed for
markets? tomorrow’s most
exciting markets?
Core competence
Fill in the blanks White spaces
What is the What new products
opportunity to or services could
Existing improve in existing we create by
markets by better redeploying current
utilising our current competences?
competences?
Figure 13.7
Source: Adapted and reprinted by permission of Harvard Business School Press from Gary Hamel and C. K. Prahalad,
Identifying core Competing for the Future. Copyright © 1994 by the Harvard Business School Publishing Corpn; all rights reserved.
competences
provide more effective disease management (e.g. for cancer, asthma care) by inte-
grating diagnostic, medical and hospital cost components into a lower-cost,
high-quality system for patients.
■ White spaces. These are opportunities to create new products or services, and enter
new markets by redeploying the business’s current core competences in different
ways. For example, the original Walkman was a white space opportunity for Sony
because it deployed the company’s competences in the tape recorder and head-
phones business units.
■ Mega-opportunities. These are the high-return, high-risk gambles of moving into
completely new markets. To make such moves work, management has to ask what
new core competences it needs to acquire to succeed. The company may then look
for acquisitions or strategic alliances to gain access to, and learn about, the
required competences. For example, the computer manufacturer Apple moved into
the huge music business with its iPod product and iTunes service (an opportunity
which Sony should have been able to take).
Once this strategic direction is defined and the core competences required are identi-
fied, management need to acquire these skills. Top companies may employ a variety
of paths to build these competences:
■ Project teams. Empowering teams to achieve ambitious strategic goals (e.g. develop
a new product, launch into a new market) creates a learning environment.
Properly motivated teams seek to acquire the skills and knowledge to make their
projects successful.
■ Training and development. If, for example, service or customer care are identified as
desirable core skills, then the business unit must comprehensively train and
develop its people in these capabilities to bring them to world-class standards.
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■ Cross-deployment. Companies often have people with scarce, world-class skills

stuck in business units with little scope to create new market opportunities. It is
headquarters’ responsibility to deploy valuable core skills effectively by encourag-
ing personnel to work across business unit boundaries on projects that are central
to the transformation process.
■ Hiring. Successful companies such as Procter & Gamble, McKinsey and Pfizer target
to recruit the best graduates and postgraduates – individuals with the latest skills
crucial to the company’s future, and with the personalities, drive and ability to
apply these skills.
■ External expertise. The turnaround company’s key need is normally to access and
absorb skills and technologies from outside. Building close links to leading-edge
university departments is a policy pursued by many top engineering and pharma-
ceutical companies.
■ Government research contracts. Companies can seek to participate in governmental
research contracts into new areas.
■ Partnerships with customers and suppliers. Businesses can lever their resources
through the common interests of customers and suppliers in developing new
products and markets. Each can input and share specialist skills, market knowl-
edge, technology and production capabilities.
■ Licensing. Licensing agreements can bring new technology, processes and products
to a company short of its own resources. Even companies with strong core skills
increasingly augment them by licensing in outside ideas.
■ Equity stakes in emerging companies. Taking equity positions in start-up companies
has also often proved a fruitful means of investing in potentially important new
areas and gaining new knowledge.
■ Strategic alliances. Corporate alliances are increasingly becoming the pattern for
adding and sharing competences. The need for speed, and for bringing in diverse
knowledge about new technologies and markets, makes partnerships between
companies often a flexible and effective way to exploit market opportunities.
Success is increasingly about being part of a successful coalition of companies.
Formulating strategy
After the management team has taken a view of the future of the industry and for-
mulated a vision of how the company will transform itself into a market leader, it
needs a more detailed implementation strategy. This process can be divided into
four stages.
Portfolio analysis
The change team needs to undertake a hard and fundamental review of the current busi-
nesses. The objective is to decide which are worth keeping and which should be divested.
As described in Chapter 4, this means looking first at the relative current and potential
strength of each of the businesses. Do they have the capabilities to be world class?
Second, it involves looking at the future attractiveness of the market. Is this an industry
that has a long-term future? From this analysis the strategic priorities should become
clear – which businesses are going to be invested in and which harvested or divested.
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For a faltering company, the key is to be decisive about divestment. Management has
to be refocused on capitalising on new emerging market opportunities, not wasting
its time on problem businesses that have no potential to generate a future for the
company. The team needs to ask a simple question: ‘If we were not in this business
today, would we go into it now?’ If the answer is no, then the business should be got
rid of as quickly as possible. These portfolio decisions need to be taken early in the
turnaround process because they have direct impact on the consolidation phase.
Cash generation and rationalisation should be targeted to those parts of the portfolio
with least potential.
Separate the businesses

A major source of a failing company’s problems is middle management lacking the
power to take responsibility and make fast decisions. Instead managers are disempow-
ered by head office committees, corporate infighting and general disillusionment
about the company’s inability to make decisive change. The only solution is to break
the business down into independent SBUs. It is invariably a mistake to tie together,
in the same business unit, businesses that are unalike. If businesses have separate
markets, different core competences or different margin structures, they are better
split and given autonomy.
As far as possible the units should be completely separated: they should have their
own sites, salesforce, operating and support staff. When staff and facilities are shared,
it almost always leads to compromise, delay, excuses for failure and unnecessary over-
heads. When a management team has profit responsibility and autonomy, the
pressure is much stronger to eliminate unnecessary overhead costs. The paradox is
that there are rarely real savings in practice in combining businesses which have dis-
tinctive market positions.
Role of headquarters
The head office of the new company should be very small. With the new
autonomous business units, headquarters should keep out of operational decisions.
Staff with operational responsibilities should be reassigned to the units – if they are
wanted. The new headquarters team has three crucial roles. Richard Branson of
Virgin, Bill Gates of Microsoft and Steve Jobs of Apple illustrate the first role – that of
energiser of the company. The second role is to be a catalyst for creating new busi-
nesses. The most obvious resource that headquarters normally controls is the
company’s cash. But the most important resource it should control are the people,
particularly those with the most valuable skills. Top management has the responsibil-
ity for triggering new business opportunities that do not fit neatly within an
individual business unit – the ‘white spaces’ and ‘mega-opportunities’ of Figure 13.7.
These opportunities may be in exploiting new markets, developing new products or
acquiring new technologies. To make these happen, top management needs to assign
key people from the business units to cross-disciplinary project teams. Management
has the responsibility to ensure that the company’s key resource – its people – are put
into areas where their contribution is maximised.
The third role is the generation and allocation of resources. The allocation task is to
ensure that the units and projects that have the potential to generate the greatest
returns get the resources they require. Consistency and patience are important here –
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few of these opportunities will be achieved within the pay-off period normally
assigned to routine investment projects. Resource allocation requires courage from
management – they have to give the new projects the chance to develop properly
and build a market position. The headquarters team also needs to take the lead in
generating new resources. This involves blending skills, technologies and best prac-
tices across the company to help individual units achieve synergy. It also involves
assisting the units to develop alliances, joint ventures, inward licensing, and supplier
and customer partnerships to access new capabilities.
Business unit and project team strategies

The units and the teams need to be challenged to develop ambitious strategies that
stretch the businesses. The components of the strategic plan have been detailed in
Chapter 4. The unit first needs a vision – an inspirational statement that defines the
positioning it wishes to capture in the minds of its target customers and how it is to
achieve it. Each unit then requires a strategic objective that describes its strategic intent.
It must define its strategic focus – whether its aim is to develop new markets or pene-
trate existing ones. Third, it needs clear thinking about its target customers. In
particular, it should understand who its customers are today and ask who the target cus-
tomers should be tomorrow. Changes in the industry and in the technology available
create new opportunities for a fundamental reappraisal of the opportunities that differ-
ent types of customers offer. For example, until the 1990s, most car and household
insurance companies saw their key customers as the independent brokers and interme-
diaries who recommended insurance policies. Direct Line transformed the industry by
perceiving that new information technology and rising service expectations permitted
the insurer to cut out the broker and go directly to the final consumer – the car owner
and householder. Such innovative thinking about paradigm shifts provides the basis for
catapulting a business from the back to the very forefront of the industry.
The fourth step of the plan is the analysis of competitor targets. It means asking again
who the competitors are today, and who they will be tomorrow. In the past Coca-
Cola’s major competitor in Europe was Pepsi Cola; today the real problem has
become retailer private-label brands that compete at much lower prices and with
assured shelf space.
The next step is the definition of the unit’s core strategy – how it will offer superior
value to customers. Again managers need to think through the dynamics – how it
will change in the future. In the past, core strategies often focused on the perform-
ance of the company’s products. But now service is increasingly the tool for the
competitive advantage. Pharmaceutical companies are generally shifting from selling
drug products to the health services in favour of disease management services.
Consumer goods companies shift their emphasis from product brands to offering
supermarkets a category management service. Successful industrial companies are
changing from supplying components to offering strategic partnerships to key cus-
tomers. The focus on service reflects a greater emphasis on meeting the customer’s
needs rather than selling the firm’s production capacity. Even more, it points to a
focus on building long-term relationships with customers.
The final stage of the strategic marketing plan is the marketing mix – putting
together an innovative set of products, services, communications and channels that
implement the unit’s new positioning strategy, meet the needs of the new target
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customers and form the basis for long-term relationships with them. This marketing
mix needs to be co-ordinated to generate a consistent set of brand values that give
customers confidence in and generate loyalty to the business.
Alongside the marketing plan should be a reassessment of the unit’s operations and
supply chain. Management will want to minimise the investment of people and
financial resources in low value-added activities and areas where it lacks competitive
advantage. Outsourcing and partnerships offer the advantage of flexibility and access
to top-class capabilities outside. It should evaluate whether its processes can be re-
engineered to take out operations that slow activities down, add disproportionate
overheads or do not directly add value.
Leadership
Leadership plays a crucial role in the turnaround situation. In the consolidation
phase, the primary requirements are a decisiveness and toughness in taking the
unpopular decisions necessary to deal with the company’s short-term profit and cash
flow problems. For the transformation phase, the leadership challenge is even greater.
Management must be able to lead the reappraisal of the changing industry, forge a
vision for the transformed company and catalyse the enthusiasm of its people to
implement the strategies required. Equally important is the skill to overcome the
resistance to change that inevitably occurs in the transformation process.
Leadership rests upon power. There are two fundamental sources of power. The first is
authority – normally the chief executive will have been given the authority by the
board to make changes. In extreme cases, when an outsider has been brought in with
a record of expertise and charismatic leadership, they are often given a blank cheque
to make the changes necessary.
But such power usually does not last unless positive results come rapidly, and one of
the problems with transformational change is that the process is likely to take several
years. New markets, new competences and new differential advantages are not
achieved quickly. To keep shareholders, employees and colleagues on board, the
leader needs to deploy certain personal traits that garner support, overcome obstacles
to change and create enthusiasm among the people. There is substantial research on
successful change agents and broad agreement about what the characteristics are:8
■ Clear vision. Successful change agents need a clear vision of what the organisation
needs to accomplish if it is to be transformed into an industry leader. They must have
formed firm ideas about where the market opportunities are, what new competences
the organisation must acquire and how the new strategies will be implemented.
■ Strong communications. A vision achieves nothing if it rests only in the head of
one person. The leader must be able to communicate the vision in such a way that
it inspires the organisation’s stakeholders. The change agent needs to create enthu-
siasm and commitment to the goals and to the belief that all will share in the
success once it is attained.
■ Decisive follow-up. Organisational transformation takes place gradually via a series
of incremental accomplishments. The leader needs to set monthly targets and
challenges for the business units, which must be rigorously followed up. Successes
have to be celebrated and failures overcome. Without a continual focus on results,
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Summary
the initial enthusiasm for change can drift away among the daily difficulties of
running the business.
■ Stamina. Organisational leadership today imposes incredible physical demands.
The company’s sites and customers are often dispersed around the world.
Management not only has to develop the strategies for the organisation, but has to
circulate continually among the staff, customers and stakeholders, communicat-
ing, inspiring and networking. Eighty-hour working weeks are the norm for these
leaders. Unfortunately, without such stamina and physical drive, it is very difficult
for a top manager to be effective today. Transformational leadership can have an
enormous personal cost.
■ Ethical standards. People expect leaders to have high moral standards and to act in
ways that are ‘fair’ to stakeholders. In the past, power, secrecy and lack of media
attention made this less important. However, today managers who are seen as
unfair or unethical lack the popular support to make the work sustainable over the
long run.
■ Networking skills. The leader of the change process must maintain effective per-
sonal relationships with others who control resources or influence that they may
need. All change agents require support and an important task is to maintain good
personal contacts with those whose endorsement may be critical when events take
an unexpected turn.
Summary
A turnaround normally involves two phases: consolidation and transformation. The former
is the easiest and quickest to accomplish. Here management focuses internally on cutting
costs, reducing assets and enhancing profit margins. By such methods, profits and cash
improvements can be rapidly realised. But consolidation alone does not revitalise a
company. In fact, if continued for long, it can easily destroy the organisation’s base for
long-run competitiveness.
The key to long-run success is the transformational process. This entails understanding
how the industry environment is changing and forging a vision of what the organisation
needs to look like to become an industry leader. This means redefining the firm’s markets
and competitive advantages and identifying the core competences that the organisation
will need to revitalise itself. The role of the change agent is to see that these questions
are decisively answered and to provide the leadership for the new strategy and the
creation of the new organisation.
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Questions
1 Take a company you are familiar with that has experienced significant decline. Using what
data are available, identify the symptoms and causes of such decline.
2 A company has net profits of €10 million, sales of €130 million, variable costs of €52
million, current assets of €50 million, fixed assets of €60 million and equity of €30
million. Calculate your basic financial planning equation. Estimate the effects of cutting
costs by 4 per cent, increasing volume by 4 per cent and raising prices by 4 per cent.
3 Repeat the exercise on Chemco for 6 per cent changes.
4 A manufacturer of branded shirts wants to achieve higher prices from the independent
outlets that market its products. Advise a strategy for implementing such a plan.
5 You are appointed as consultant to a large multinational that is seeking to develop a
turnaround strategy. Outline the steps for such a strategy, suggest how they will be
accomplished and estimate the time required for completing each of them.
6 Looking at the characteristics of leadership described in the chapter, develop a seven-point
scale to rate the experience of the most successful manager you know. Then rate yourself
against these criteria.
Notes
1. Michael Beer and Nitin Nohria, Breaking the Code of Change (Boston, MA: Harvard Business
School Press, 2000).
2. See, for example, Tony Hope and Jeremy Hope, Transforming the Bottom Line (Boston, MA:
Harvard Business School Press, 1996).
3. Michael V. Marn and Robert L. Rosiello, ‘Managing price, gaining profit’, Harvard Business
Review, September–October 1992, pp. 84–94.
4. Peter F. Drucker, Innovation and Entrepreneurship (London: Heinemann, 1985).
5. Gary Hamel and C. K. Prahalad, Competing for the Future (Boston, MA: Harvard Business
School Press, 1994), pp. 115–22.
6. John Kay, Foundations of Corporate Success (Oxford: Oxford University Press, 1993),
pp. 63–86.
7. Hamel and Prahalad, op. cit., p. 227; H. Igor Ansoff, Corporate Strategy (Harmondsworth:
Penguin, 1968), p. 99.
8. For example, Dave Ulrich, Jack Zengo and Norm Smallwood, Results Based Leadership: How
leaders build the business and improve the bottom line (Boston, MA: Harvard Business School
Press, 1999); Christopher Barlett and Sumantra Ghoshal, ‘Changing the role of top
management’, Harvard Business Review, May–June 1995, pp. 132–42.
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‘Almost everybody today believes that nothing in

economic history has ever moved as fast as, or had
a greater impact than, the Information
Revolution. But the Industrial Revolution moved
at least as fast in the same time span, and had
probably an equal impact if not a greater one.’
Peter F. Drucker
Chapter 14 MARKETING IN THE FUTURE
In this final chapter the focus is on three questions. First, how will marketing evolve in
the years ahead? Second, what factors appear not have changed marketing and third
how if at all should marketing embrace the concept of corporate social responsibility?
Can it add value or is it a management distraction – the current fad?
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Chapter 14 Marketing in the future
Marketing: a recapitulation
Before an effort is made to forecast how marketing will change, it is useful to recapit-
ulate the core concepts of marketing, marketing strategy and the organisational
capabilities required for effective marketing performance. This is reviewed under
four headings: the marketing concept, segmentation and positioning, planning and
core capabilities.
The marketing concept

The marketing concept is at the heart of the free enterprise capitalist system. In a
competitive economy, customers can choose from whom to buy. In today’s global
markets they are offered an increasing variety of choices by companies from around
the world. Customers choose to buy from those companies that they perceive as
offering the best value. Value is a function of the perceived quality and the price of
the company’s offer. Consequently, to succeed companies must be managed to offer
superior value in terms of lower prices or higher quality. Unless they are competitive,
they cannot generate the revenue from customers to survive.
Marketing – the task of seeking to provide customers with superior value – is so central
that it cannot be seen as just another function alongside production, finance or per-
sonnel (Figure 14.1(a)). The central task of management is finding better ways of
meeting the needs of customers. This is illustrated in Figure 14.1(b). The central focus
of the business has to be the customer. The marketing department has a role to play in
helping create value, but is no more central than R & D, production, finance or per-
sonnel. The marketing specialist may take the lead in researching the customer and
developing sales strategies, but the other functions play key roles in innovation, prod-
uct development, quality and responsiveness. The marketing concept is the integrative
outlook that should bind the separate activities together. Marketing is essentially a
team effort and its accomplishment needs to be organised to reflect this fact.
How the firm should view the task of delivering value to customers is shown in Figure
14.2. The old-fashioned, production-oriented companies operate as in Figure 14.2(a).
Engineers develop a product that they think is attractive; the job of marketing people
(a) (b)
Production Production
R&D R&D
Finance Finance
Customer
Marketing Marketing
Figure 14.1 Personnel Personnel
The role of
marketing in the
organisation
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Marketing: a recapitulation
Manufacture the product Sell the product
re
prom tise/
actu
ute
hase
ice
ote
pr od n
uct
rib
uf
g
r
Price
Desi
Adve
Ser v
Pu r c
Man
Dist
Sell
(a) Traditional production orientation
Value selection Value provision Value communication

tion
Ser v uting/
ent
ent
ng
e
ng
mak ing/
segm mer
sforc
otion
enta
lopm
lopm
r tisi
icing
ction
tioni
uct
ice
et
ng
rib
ing
o
s
Figure 14.2
e
Mark
Adve
Sour
Ser v
Cust
Pr od
Sale
Sale
prom
Prici
Valu
Dist
deve
deve
sele
posi
Production
orientation and
customer-led value (b) Marketing and value creation
creation
is then to sell the product that the company manufactures. Today, such an approach
rarely works. Why should it? The engineers have not analysed the market; they do not
know what customers want or what competitors are offering. The consequences are
that the salespeople often do not believe in the product and the customers do not see
any new value in it. The results are poor: sales and margins are inadequate and the
company fails to build a viable market position.
The modern marketing-oriented approach operates as in Figure 14.2(b). It starts with
managers segmenting the market and understanding the value needs of customers.
They then develop positioning strategies for the segments upon which they decide to
focus. After the opportunity is defined, a team-like approach across the functional
areas is needed to develop and provide the fast, value solution to match the opportu-
nity. Next, marketing and sales people have the task of communicating the value to
the market. Finally, the organisation seeks to obtain continuous feedback so that a
long-term relationship with the customer can be built.
Segmentation and positioning

Market segmentation and positioning are the two fundamental marketing tasks.
Customers in any market are very heterogeneous. The first job of management is to
find ways of effectively segmenting their markets. There are two principal criteria:
differences between customers in their actual or potential needs, and differences
between them in what they may be willing to pay for a solution to their needs. In
consumer markets, such differences are often correlated with income, age or lifestyle.
In industrial markets, these differences are often associated with the industry of the
end user and customer size. Only by segmenting markets are firms likely to be able to
meet the needs of the individual customers effectively and profitably.
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The identification of new market segments represents among the most powerful forces
of innovation today. It offers growth and profit opportunities with minimal technical
risk and investment. However, the company does have to position the product effec-
tively both to the new consumer group and against current competitors. For example,
GSK’s Zantac was among the world’s top-selling pharmaceutical products with annual
sales of almost €3 billion. Its primary use was the treatment of ulcers and other severe
gastro-intestinal problems. However, by 1996, profits and sales were flattening out as
the product’s patients expired and low-priced generics entered the field. But the com-
pany’s marketing strategists identified a new target market – the treatment of
heartburn and indigestion. Zantac was reformulated to a lower dose and the product
was licensed for sale without prescription; this created major new growth areas for the
business, partly offsetting the predicted decline in Zantac.
Successful marketing is essentially about strategies such as that pursued by GSK. The
major technological breakthroughs that create radically new markets or make current
competition obsolete are too few and far between to be worth banking on in develop-
ing long-term strategies.
Many textbooks advance the thesis that positioning strategies can be divided into three
types: differentiation, cost leadership and focus. A differentiation strategy is based upon
achieving premium prices by offering unique value in one or more attributes desired by
customers. This might be superior product performance, service or image. Cost leader-
ship is based upon being the single, lowest-cost producer in the industry and using low
price as a means of gaining market share. A focus strategy concentrates on serving a
specific segment more effectively than broader-based competitors.
However, such generic strategies look too naive in today’s environment. Now success-
ful companies need a combination of all three. Companies today cannot succeed
without segmenting their market and focusing offers on each segment. Low prices
rarely make a viable strategy: even the poorest customers seek a range of attributes
besides price. Companies that focus solely on minimising costs are invariably
trumped by companies with innovative solutions that change the basis of competi-
tion and make the experience curves of competitors obsolete.
Marketing planning
Marketing planning should start with an analysis of the potential of the market.
Professor Michael Porter’s five-forces model provides a useful tool for assessing the
overall attractiveness of the market.1 This suggests that average profitability in an
industry depends upon the following:
■ Inter-industry rivalry. The more fierce the competition between companies in the
market, the greater the pressures on prices and profits.
■ Power of buyers. If the customers are powerful, then the profits that suppliers earn
will be under continual pressure.
■ Substitute products. If there is a threat from substitute products or services, this
again caps the price increases that suppliers can obtain.
■ Potential entrants. The lower the barriers to entry, the less likely it is that compa-
nies will be able to maintain a high level of profitability.
■ Power of suppliers. The bargaining power of suppliers affects the cost competitive-
ness of the companies.
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Changing marketing environment
Consequently, some markets are much easier than others in which to make adequate
returns. Pharmaceuticals, soft drinks and cosmetics have had high average levels of
profitability. Steel, personal computers and tyres have been very tough to operate in.
In the latter industries, even innovative products often produce only modest and
short-term profit improvements because the innovations are quickly copied, strong
buyers push prices down, or new entrants erode margins. But while these five forces
determine the average pattern of results, behind these averages there are often wide
divergences of performance. Some companies can do exceptionally well in tough
industries; others do poorly in industries with high average returns.
Planning to beat the odds and shift the balance of industry forces in the company’s
favour starts with portfolio analysis. Most companies operate in a range of markets
with a range of products. Some of these have great potential; others are increasingly
uncompetitive. The task of management is to identify appropriate marketing and
financial objectives for each of these strategic business units. For some it will make
sense to pursue aggressive market development strategies; for others, harvesting or
cash flow management may be the goal.
Once the objectives for a market are defined, the marketing plan centres around
understanding the target market segment and developing a differential advantage.
After the positioning strategy is formulated, the marketing mix is designed: product,
price, promotion and distribution policies. Finally, an action plan has to be developed.
Core capabilities and strategic intent

What is clear is that clever strategies are not enough. There are two additional
requirements for the strategies to be implemented successfully. The first is the com-
mitment of the people in the organisation to the success of the strategies. The second
is the knowledge and skills to deliver superior value. The former is now commonly
referred to as strategic intent – a goal, enthusiastically endorsed by managers and per-
sonnel, to make the organisation the leader in its chosen market or channels. Such a
commitment requires visible, consistent leadership from the top, creating an inspir-
ing vision for the people who work in the organisation.
The second requirement is for the company to possess core capabilities: to develop in
its people the specialist technical or marketing skills to produce products and services
of outstanding quality and value. Unless the company invests in its workforce and
puts in the training programmes to enable them to achieve top-quality performance,
the idea of creating a world-beating company is mere wishful thinking.
Professional marketing has become more important as advanced countries have

shifted from a supply to a demand environment. For most of history the world has
been characterised by insufficient supply: not enough food and material goods to
meet human requirements. The key priority in the past has been improving produc-
tion, purchasing and the finance of trade. Today this has all changed. Now, the
advanced countries are characterised by excessive supply. The central problem is
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attracting demand, not meeting it. Faced with an array of alternatives, the customer
is spoiled for choice. The priority in management is how to identify and develop
goods and services that are more attractive to customers than those of competitors.
As the market environment changes, managers have to adapt their strategies and
organisation. Unless these changes are made, the business will no longer fit the needs
of the moment – it will be made obsolete by changes in customer wants, new tech-
nologies and new competitors that have adapted more effectively. The first edition of
this book (1994) looked ahead to the next millennium and categorised drivers of
change under 10 headings all of which are still relevant looking forward a decade
later. These changes are discussed here.
Fashionisation
In the past fashion was identified with women’s clothing. But today more and more
markets – watches, motorcycles, beer, cars, pharmaceuticals, cinema, music, electronic
goods, even management courses – are characterised by annual model changes, rapid
obsolescence and an unpredictable and fickle demand. Companies that cannot handle
novelty, rapid model replacement, fashion and style see their market shares slipping
and their profit margins eroding as their products look increasingly dull and old-
fashioned to customers. New models and new services have become the key to main-
taining or enhancing prices or margins. Without novelty and continual feature
enhancement, the company will see its prices and market share relentlessly chiselled
away. The original iPod (which was offered to Philips and RealNetworks before Apple
by its inventor Tony Fadell) was launched in 2001 and updated twice within the next
year. By mid-2005 the range had grown to four basic models all targeted at different
uses and users and positioned as the music fashion accessory.
Micro-markets
The old textbooks used to postulate that a company could choose between a differen-
tiated and an undifferentiated strategy. An undifferentiated strategy is where a
Table 14.1
Changing environment Marketing strategy Organising for marketing
The changing
marketing
Fashionisation Speed Breaking hierarchies
environment and its
implications Micro-markets Customisation Small business units
Rising expectations Quality Self-managing teams
Technology Information networks Re-engineering
Competition Core competences Strategic alliances
Globalisation Think global Transnational organisation
Service Software augmentation Learning organisation
Commoditisation Partnerships Account management
Erosion of brands Innovation Expeditionary marketing
New constraints Stakeholders Role of the board
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company makes a single product for the whole market. The usual example was Coca-
Cola, which, it was said, offered one product, in one bottle size, at one price and with
one advertising message to all customers, everywhere in the world. No longer. Even
Coca-Cola is today offered in an increasing and bewildering variety of forms – new
Coke, classic and cherry, with or without caffeine, diet Coke, in cans or in numerous
bottle sizes, all advertised in various styles and formats. Today’s customers expect the
manufacturer to customise the product and service to their specific needs.
Technology has made this variety expansion economically viable for companies. New
flexible systems, such as computer-aided design and manufacturing and customised
software, permit ever-finer market segmentation and product range expansion.
Finally, the new communications technology makes it possible to deliver individual
messages to customers.
Rising expectations
The success that high-performance companies have had in raising the quality of their
products and services has led to continually rising customer expectations. Today’s
customers will no longer accept the delays, variations in product performance and
sloppy service that were the norm a generation ago. Many companies see customers
giving them poor ratings for performance, not because they are getting worse, but
because they are not raising quality standards as fast as their competitors.
Technological change
Technology continues to advance at a very rapid rate in many industries. Successful
companies do not need to be technological pioneers, but they do at least need to be
fast followers. Companies that resist change in their products or processes risk faster
obsolescence than in the past. Competition and rising customer expectations are
shortening the time taken for new technologies to gain mass-market acceptance.
Competition
Competition is unquestionably getting tougher in most industries. Many of the
weaker players have already been shaken out. Market barriers have fallen with declin-
ing tariffs, lower transport costs and the speed of real-time information about market
opportunities. Eroding profit margins and pressures from shareholders are forcing all
companies to sharpen their competitiveness and raise their levels of performance.
Globalisation
Today we live in a ‘global village’. Rising incomes and particularly access to informa-
tion through television, the Internet, travel and advertising messages have created
common demands and expectations in all countries. Common demands have created
the opportunities for common suppliers. Now, since every business faces global com-
petitors, they all have to consider themselves international businesses.
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Service
Customers increasingly want a service rather than a product. Real product advantages
are difficult to gain and even harder to maintain, so that differentiation is increas-
ingly based upon how companies augment their products with additional services.
Both BA and Virgin Airlines fly businesspeople on Boeing 747s from London to
Tokyo, but Virgin captured share by providing its business-class customers with a
chauffeured car service to take them from the plane to their home or hotel when
they arrived. Business schools differentiate themselves by services that augment their
core products – residential facilities, spouses’ clubs, crèches, career counselling, place-
ment services, alumni associations and so on. Differentiation in services and software
is a continually developing competitive battleground.
Commoditisation
Today’s speciality products are tomorrow’s commodities. Services that customers
today regard as special, tomorrow will be seen as standard. Profitable products and
market niches invariably attract new entrants that copy the successful innovators and
compete for market share by lowering prices. As customers gain familiarity with using
products and services, they look increasingly upon them as commodities and price
becomes more and more important. Unless companies can keep moving the goal-
posts through faster innovation, profit margins invariably decline.
Erosion of brands
In most markets the mega-brands such as Coca-Cola, Marlboro, IBM, Hertz, the BBC
and McDonald’s are losing share. This is being caused first by the fractionalisation of
once homogeneous markets. Intensified competition and innovation and more
options are leading to a changing diversity of micro-brands rather than a few mega-
brands. Second, buying power, especially the power of the major retailers, is eroding
manufacturer margins and hence their ability to put advertising support behind their
brands. Most of the manufacturers’ marketing spending now goes to providing pro-
motions and discounts to get retailers to carry their brands.
New constraints
Changes in government, politics, the economy and society also bring new con-
straints that create both new threats and new opportunities. One is new regulations
from governments and regional authorities such as the European Union. In particu-
lar, companies that produce products that are harmful to the environment face
increasingly stringent constraints and outright bans. Another trend is the raising of
ethical standards. Companies that pursue policies which look unfair, immoral or dan-
gerous are coming under increasing scrutiny and criticism. Managers are now facing
new challenges to define their social and ethical standards as is discussed as the third
question below.
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Less significant than predicted?
Less significant than predicted?
The Internet
Earlier editions of this book mentioned the Internet as having a potential impact on
marketing, but was less effusive than other texts. It is clear that the Internet now
plays an important part in the way that companies communicate and that many
businesses could not operate without it. Following the bursting of the dot.com
bubble it is now evident that only businesses which provide customers with superior
value are growing, and while some are doing so profitably others are finding it
more difficult.
The most successful direct to consumer Internet businesses in terms of revenues and
profits are those which provide customers with instant gratification, which explains
the recent IPO of Partygaming, a business founded in 1997 and valued by the stock
market at €9 billion following flotation in 2005. Apart from gambling, pornography
appears to be the most successful online business worth some $5 billion in annual
revenues and growing fast.
The next and perhaps most important application of the Internet is its use for gather-
ing information (another form of instant gratification), but it has proved very
difficult for companies to market information and generate profits. For example,
ADVFN, which was founded in 1999 to provide financial information to investors,
had 450,000 registered users by 2004 but generated less than €12 per user in a year.
The information application is used extensively by companies as marketing support,
and they are able to produce ‘glossy’ brochures without the costs of traditional pub-
lishing. In fact more often than not it is the consumer who bears the cost of the
paper and ink when they print the information out at home.
Online availability of traditional retail formats is another area which has been pro-
moted as an example of the fundamental impact of the Internet. Tesco.com is the
most quoted example of a successful retail extension and with revenues in 2004 of
around €1,000 million it is one of the largest online businesses in the world.
Tesco.com delivers groceries to the door for a charge of around €8, but some analysts
point out that the cost of picking the order from the store and delivering it is greater
than the delivery charge and the margin Tesco earns on the groceries purchased. The
contrast with ADVFN is stark – Tesco’s online customers spend an average of around
€1,000 per year on groceries, but these sales may not be profitable on a stand-alone
basis. Tesco relies on its online customers also buying the higher margin non-grocery
products such as financial services and white goods to make incremental profits. The
other reason for operating the home delivery of groceries is strategic – it is better to
canabalise its own grocery margins, than lose the sales and associated opportunities
to the competition.
EBay is another highly successful Internet business which combines information with
rapid (if not instant) gratification. Buyers and sellers can easily see market prices and
so decide on whether they wish to trade, but in addition the company provides a
matching service for buyers and sellers of sometimes obscure or valuable items rang-
ing from memorabilia to concert tickets, second-hand Rolex watches or even lunch
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with Warren Buffett. The direct sale of second-hand items is one example of disinter-
mediation, with another major example being the growth of budget airlines such as
easyJet which only sell the cheapest tickets online. The budget airlines are an exam-
ple of the Internet acting as an enabling technology cutting out the costs and
margins of the travel agent and passing on the savings to customers, provided they
do the booking online themselves.
While the Internet affects everyone, its impact on marketing has not been as dra-
matic as some had predicted and the biggest impact has occurred in the lower profile
business-to-business arena where the Internet has facilitated the development of the
pre-existing Electronic Data Interchange as well as providing shop windows, stream-
lining back office applications and providing specialist auction sites for contracting
and supply.
The Internet is of course developing fast and this will continue, but one measure of
its impact is shown in the context of Tesco. By the end of 2004 Tesco’s online rev-
enues still represented less than 2 per cent of total sales and Tesco’s single store in
Calais selling alcohol and tobacco had turnover of around €300 million in 2004 com-
pared to Tesco.com revenue of around €1,000 million.
The segment of one

This term was developed in the late 1980s by the Boston Consulting Group2 and
combined the concepts of mass customisation and database marketing with a vision
of providing individual marketing solutions which would prove desirable to cus-
tomers. Database marketing has developed into Customer Relationship Management
(CRM) with the objective of using these systems to develop personal communication
programmes in conjunction with appropriately tailored offerings. Three problems
remain. First the approach requires current, correct data and studies show that CRM
applications have the highest error rates of any corporate IT system. The second prob-
lem is that mass customisation has only been demonstrated in a small number of
areas, the most notable being Dell, and here the customer choices remain quite con-
strained. The third problem is that organisations are traditionally built on
minimising customer contact and a complete change of design and culture would be
required to service individual customers on a large scale.
Loyalty
The convergence of information technology, mass customisation and the Internet
were thought to provide a way to increase customer loyalty, value and hence prof-
itability. In practice this has not happened and if anything the information content
provided by the Internet has decreased loyalty in subscription-type markets such as
utilities, insurance, mortgages and other financial services. Consumers are now able
to compare premiums and rates and switch suppliers with ease. While there is some
evidence to show that shoppers are slightly more loyal when buying groceries online
than when buying in-store the dominant pattern of purchase of most consumer
goods is one of divided loyalty where consumers continue to patronise a portfolio of
similar, competing brands.
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More significant than predicted?
In these frequently purchased consumer markets there is already an established body

of empirical knowledge which demonstrates that loyalty needs to be reconceptualised
from an approach which sees Company A ‘owning’ its consumers to one where
Company A sees its consumers as customers of its competitors who sometimes buy
from Company A.
Recent research has shown that loyalty to brands in the long run is largely pre-
dictable with the main exception being the excess loyalty shown by heavy buyers,
but only in the short term.3
Ethics and social responsibility are increasingly important due to high-profile proven
cases of unethical mismanagement, concerns about the influence of marketing, espe-
cially on children’s diet and the consistent attempts to create pressure on G8
governments to instigate the alleviation of poverty, especially in Africa.
Examples of unethical mismanagement include Enron, Parmalat, AIG and
WorldCom.
Bernie Ebbers was feted in the late 1990s when his WorldCom company acquired the
much larger MCI Corporation in 1998. In 1999 he was estimated to have a personal
wealth of close to $2 billion. In 2002 he was charged with conspiracy and fraud relat-
ing to a sum of $11 billion.
While CEO of WorldCom, he was a member of the Easthaven Baptist Church in
Brookhaven, Mississippi. As a high-profile member of the congregation, Ebbers
regularly taught Sunday School and attended the morning worship service with his
family. His Christian faith was overt, and he often started corporate meetings
with prayer.
Federal authorities indicted Ebbers with security fraud and conspiracy charges on
2 March 2004. An amendment to the indictment on 25 May 2004 increased the list
of charges to nine felonies: one count each of conspiracy and securities fraud, and
seven counts of filing false statements with securities regulators. Ebbers was found
guilty of all charges on 15 March 2005.
While this and many other scandals were financially based, as the outward facing
element of many companies marketing can become associated with unacceptable
behaviours and must consider the impact of its activities.
For example, in 2005 Reebok launched a new global advertisement campaign head-
lined by Rapper 50 Cent, with €20 million spent on the European campaign.4
Controversy surrounded the campaign with claims that the advertisement glamorised
and perhaps even glorified gun culture. The Disarm Trust, an anti-gun charity in the
UK, called the commercial ‘irresponsible and despicable’, and accused Reebok of
‘preying on young impressionable black males’.
The campaign is based around the core idea ‘I am what I am’ and Reebok defended it
arguing that the ‘advertising campaign is intended to be a positive and empowering
celebration of this right of freedom of self expression, individuality and authenticity’.
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The trend towards healthy eating has affected companies like McDonald’s, Coca-
Cola, Kellogg’s and Cadbury, forcing them to re-examine both their product offerings
and their promotional activities.
In 2003 Cadbury announced a promotion which linked consumption of chocolate to
sports equipment for schools. Children were expected to collect wrappers from the
promotional bars and schools would collect them from all pupils. For example, a set
of volleyball posts and nets required tokens from 5,440 bars, costing €3,000 with
1.25 million calories. A 10-year-old child eating enough chocolate to get his school a
basketball would need to play the game for 90 hours to burn off the calories con-
sumed. The promotion was clearly ill-advised and placed the company under the
ethical spotlight for a considerable period.
The link between poverty in the developing world and exploitation of labour by large
corporations has also been documented, with Nike being the most famous example
of a company changing its manufacturing policies as a result of public and media
pressures.
The two extreme views on CSR can be summarised as follows. CSR is a distraction
from management’s responsibility to add value to shareholders. If corporations focus
solely on their business objectives they will maximise benefits to society through
increased employment, taxes and so on. The opposite view claims that corporations
are required to be good ‘corporate citizens’, with the aim of improving society and
safeguarding the environment, and every single corporation is desperately attempt-
ing to prove to the public that this is indeed one objective they are pursuing.
There is evidence to show that while consumers say they prefer to buy products from
socially responsible companies their actions are inconsistent with their preferences.
Hill5 conducted a survey that revealed that 88 per cent of participants questioned
claimed to be ethical shoppers who took environmental and social concerns into
consideration. But when the same people were asked in more depth about their
actions in the supermarket, only 23 per cent could name any behaviour on their part
that would justify their claim.
The idea of good corporate citizenship is not a new one, however only recently has it
emerged as a fashionable term after much lobbying from charities, non-government
organisations and ‘civil society’ as a whole to move it up the corporate agenda.
Corporate social responsibility has grown in popularity so much that it can now be
regarded as an industry in itself. Consultancies now exist to advise companies on
how to implement corporate social responsibility strategies and how to be better cor-
porate citizens. Corporations now commonly appoint executives with their own
team of staff, with the sole task of developing and co-ordinating the social responsi-
bility operations. For sceptics of the apparent significance of corporate social
responsibility the ideal remains still too marginal and too voluntary to make a real
difference in business behaviour. Whether one is a champion or sceptic, there is little
doubt that the last decade has been a turbulent time for corporations worldwide and
this has brought about the introduction of voluntary programmes and partnerships
advanced by governments and civil society, and the emergence of international codes
and standards to instill social responsibility into the heart of corporations.6
Lantos7 identified three categories to which corporate social responsibility belongs:
ethical, altruistic and strategic behaviour. Ethical corporate social responsibility is
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morally mandatory and extends past the economic and legal obligations of the organi-
sation, even though it may not appear to benefit the organisation. Altruistic corporate
social responsibility is concerned with contributing to the good of various societal
stakeholders. This viewpoint assumes an implicit corporate social contract exists
between business and society, and companies agree to steward society’s resources. The
third concept is that of strategic corporate responsibility, which implies that only
those social activities are undertaken that achieve strategic business goals. The socially
responsible actions of the organisation are sought out of self-interest.
When looking at corporate social responsibility policies, it is necessary to analyse the
effect of these policies on: (a) the company’s long-term profitability, and (b) the
advancement of the broader public good. These policies can be put into one of four
categories, illustrated in Figure 14.3.
This classification suggests that the majority of corporate social responsibility policies
that companies adopt reduce both profits and social welfare. Despite the fact that the
costs involved are usually relatively small, these ‘delusional’ corporate social responsi-
bility policies are simply undertaken for the sake of appearing to be socially
responsible, and deliver no new resources to worthy causes therefore causing a net
loss of welfare. An example is recycling: there is no doubting that there are cases
where it makes good business sense to recycle, however in the majority of cases recy-
cling requires a large amount of effort and resources to be devoted, and costs are
surprisingly high considering collection, transportation and processing. Since this
usually leads to private costs exceeding private savings, profits decrease and most
likely so does social welfare. Some may argue that this measurement fails to include
the social requirements to conserve natural resources and that the market does not
reflect the scarcity of these resources. However, if the world was running out of
resources, there is absolutely no doubt that this would be reflected immediately in
the financial markets, since prices reflect current and future supply.
The next common policy is a pernicious corporate social responsibility policy, which
increases profits but reduces social welfare. This is exemplified through the UN and
World Bank advocating sustainable development, which places emphasis on environ-
mental protection and responsible behaviour towards workers and communities in
developing countries. Some advocates of corporate social responsibility argue that
multinational companies operating in developing countries are exploiting cheaper
labour and that any terms that are less generous than those which workers in rich
countries get is exploitative. Faced with these accusations of running ‘sweatshops’,
Raises Reduces
social welfare social welfare
Raises Good Pernicious

profits management CSR
Reduces Borrowed Delusional

profits virtue CSR
Figure 14.3
Classification of Source: C. Crook, ‘The good company’, The Economist, 22–28 January 2005
CSR policies
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many companies’ policy has been not to invest or divest in countries such as
Bangladesh, Indonesia or India. However, it is well known that foreign direct invest-
ment in third world countries is one of the most significant drivers of economic
development, as wages offered by multinationals are indeed significantly higher than
what the local economy can provide, reflected in the great demand for these jobs in
developing countries. Despite the well-meaning efforts of these advocates, by attack-
ing company actions they discourage investment. Maintaining a good reputation is
now a critical issue for management of any well-run company, who in today’s climate
must take account of how they are perceived by their customers, employees and the
public at large. This pressure of outsiders’ perceptions is without doubt essential in
ensuring that companies in the private sector behave correctly. Misguided public
demands on companies can have a detrimental effect on profitable conduct. It is
possible for a company to be socially aware but reduce its profits. For example, if con-
sumers reject outsourcing call-centres by service companies due to a lower quality of
service, this is the market working as it should. But if it is due to a false perception
that workers are being exploited, this is not the market working fine, it is the wrong
decision based on public misconceptions.
If corporate social responsibility is to go beyond philanthropy it must be more than
rhetorical and become embedded within the organisation. Shell has had a CSR policy
for a number of years which was recently supported by an advertising campaign
which claimed that ‘Only by behaving responsibly can any company hope to operate
profitably’. Its CSR record was subsequently challenged in an embarrassing report by
Christian Aid8 which demonstrated that the company’s action was inconsistent with
its stated policies.
Corporate social responsibility in action – TNT
In November 2001 Peter Bakker, CEO of TNT, the international logistics and express
parcel delivery company, was reading an article in Business Week while flying to
Singapore. The article looked at how poverty in some parts of the world could
prompt people to support terrorist attacks such as those of September 11th. Bakker
learned that each night 800 million people go to bed hungry and every five seconds a
child dies from malnutrition. The article’s author asked the readers what personal
action they would take to help fight the causes of this violence.
Shortly after his return from Singapore he had a meeting scheduled with the organis-
ers of the Dutch Open Golf Championship which TNT had sponsored for five years.
Bakker was certain that the funds allocated to this sponsorship needed to be switched
into some activity which would alleviate world hunger and so he declined to renew
the golf sponsorship. The article which Bakker had read had noted that there was
enough food in the world for everyone; it is just not available in the places where it is
needed most and so it was a problem of logistics.
During the following year Bakker explored ways in which TNT could form a partner-
ship which utilised the skills of the company to help in the fight against hunger and
he soon identified the World Food Programme (WFP) of the United Nations as a
potential partner. During 2002 Bakker and a small team visited a number of the WFP
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Corporate social responsibility in action – TNT
projects to see the work at first hand and drew up an outline project with specific
objectives. On 2 September 2002 Bakker and James Morris, the Executive Director of
the WFP, signed a five-year partnership which made the skills and resources of TNT
available to help the WFP achieve its objectives. In 2003 TNT made €5 million avail-
able and this was augmented with a further €1 million from TNT employees. The
corresponding figures for 2004 were €8.7 million from the company and €1.8 million
from the employees.
From the outset it was clear that support from the top levels in both organisations
was essential for the success of the partnership. Five core initiatives were identified,
each of which were sponsored by a TNT board member and senior WFP executive.
The day-to-day management of the initiatives is the responsibility of senior managers
and specialists from both organisations. The initiatives are:
1. Joint Logistics Supply Chain. The Joint Logistics Supply Chain (JLSC) initiative
leverages TNT’s core logistics strengths to increase the efficiency and effectiveness of
WFP’s infrastructure. In practice, this means developing better located, managed, and
equipped storage locations and better system links between them, so that the aid
organisation can more rapidly respond to emergency needs. The initiative has imple-
mented various projects to help WFP optimise its warehousing facilities, select a new
warehouse management information system, and improve its fleet management. One
of the successful initiatives was a transport capacity model which aimed to improve
routes and depot locations to help refugees returning to southern Sudan. The project
was developed over six months by two TNT logistics specialists and resulted in
monthly savings in transport costs of €300,000.
2. Emergency Response. Much of WFP’s work involves getting food to the hungry in
emergency situations. WFP establishes emergency operations to address refugee
crises, sudden disasters such as floods or earthquakes, slow-onset disasters such as
droughts or crop failures, and complex emergencies such as conflicts. TNT’s Express
division was the obvious choice to spearhead the initiative that supports WFP in
these activities. The initiative takes a three-pronged approach, offering direct logisti-
cal support for emergency operations, organisational expertise to enhance the
emergency response business process, and practical training to help bring WFP’s air
operations up to international standards. TNT resources and networks help WFP
respond quickly to emergencies. For example TNT transport, warehousing and per-
sonnel supported WFP’s tsunami response.
3. Private Sector Fundraising. TNT is the first major international corporation with
which WFP has established a long-term partnership. In support of WFP’s goal to find
new corporate donors, the Private Sector Fundraising initiative is helping WFP iden-
tify potential corporate partners in other industry sectors, including information and
communications technologies, business consultancy, food and fuel. In addition to
providing new sources of direct funding, these new partnerships will also offer serv-
ices or goods appropriate to WFP’s needs and activities.
4. Transparency and Accountability. Prior to the launch of the partnership, WFP indi-
cated to TNT that a vital way they could be of assistance was in the areas of
accounting, auditing and human resource management. Both aid organisations and
corporations are required to disclose detailed financial information regarding the
sources and allocation of funds, programme statistics and accounting principles. TNT
possesses a broad spectrum of skills and systems in this complex domain, and the
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Transparency and Accountability initiative is implementing a number of projects pro-

posed by WFP to help it achieve its objectives in each area.
5. School Feeding Support. The School Feeding Support initiative ensures that TNT’s
160,000 employees around the world are inspired by and involved in the partnership.
WFP’s Global School Feeding campaign was the clear choice as the focus to inspire
TNT employees to raise funds for WFP. To spur on their fundraising activities, the ini-
tiative runs a volunteer scheme allowing at least 36 selected employees the
opportunity to work on WFP projects in the field, and, upon their return, sharing
their experiences with their colleagues back home and around the world.
The TNT initiative leaders and their project teams report to the Programme Director,
who ensures that funds are available and targets met. The Programme Director
reports directly to the CEO of TNT and maintains a Programme Office with a team
dedicated to supporting the initiatives by delivering communications and financial
expertise, among others.
What differentiates this CSR initiative from the myriad of others run by large corpo-
rations is that it goes far beyond corporate philanthropy. The company has clear
objectives for the programme to add value to the business. It sees ‘Moving the World’
increasing the engagement of its 130,000 employees and thereby improving their
efficiency and reducing costs while at the same time serving customers better and so
providing opportunities to increase revenues. The existence of the programme is also
expected to make attracting good recruits easier and ensure that employee retention
levels improve. The company also sees reputational benefits which also enhance the
ability to recruit and retain excellent staff. Finally there are considerable benefits
from the publicity which the whole programme generates.
While it is too early to measure recruitment and retention, the company has
researched the impact on its employees and on its reputation. Within two years of
the start of the programme over 70 per cent of employees had either donated money,
organised events or worked on a Moving the World project. Over 60 per cent of
employees felt prouder of their company as a result of the WFP partnership. In 2002,
before the establishment of the partnership, TNT was ranked twenty-sixth in terms of
corporate reputation by the Dutch public. One year later when the partnership had
been running for a year TNT was ranked fifth.
The company is clear that the relationship between its employees and the partner-
ship is critical and is continually looking for ways to maintain their interest and
commitment. As yet they have not involved their customers even though they have
many global accounts, a number of which could potentially involve their own
employees.
Perhaps the most important benefit from a marketing perspective is that the partner-
ship with the WFP has allowed TNT to start to differentiate itself from its competition
(UPS, Fedex and DHL) in a way which cannot be imitated. This differentiation will be
key to developing the TNT brand in an industry which is becoming increasingly
homogenous.
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Notes
Summary
The principles of marketing – being customer led, effective segmentation and positioning,
and sound planning – will remain fundamental to the successful firm in the years ahead. In
fact, the changing environment will test these skills as never before. The pace of change –
splintering markets, fashion and variety, together with ever-increasing competition – is
making past strategies and organisations obsolete at breathtaking speed.
The Internet is an increasingly important communication tool which can enable marketing
activities, but its main impact is in relatively well-defined areas. Mass customisation and
loyalty-based marketing have not yet delivered the anticipated benefits.
Apart from coping with expanding legal and regulatory constraints, organisations will
increasingly need to engage as corporate citizens and are faced with a significant
challenge to integrate these activities within the core of the business. There are
opportunities here to produce real differentiation from competitors which has the
potential to add value to shareholders.
Questions
1 What are the core concepts of marketing? Are they likely to change in the future?
2 Is ‘marketing’ primarily a function or a philosophy?
3 Take an industry familiar to you and analyse the key environmental changes taking place.
Then identify how top-performing companies are adjusting their strategies and
organisations to gain competitive advantage.
4 Apart from Dell, which other companies could develop a viable mass-customisation
offering? What do you think the barriers are?
5 Peter Drucker recently wrote that capitalism is giving way to the ‘knowledge society’.
Knowledge is replacing capital as the basic resource of economies. What does this mean
and what are its implications for management?
6 Devise a CSR partnership programme for McDonald’s.
Notes
1. Michael E. Porter, Competitive Strategy: Techniques for analyzing industries and competitors (New
York: Free Press, 1980).
2. R. Winger and D. Edelman, Segment-of-One Marketing, Boston Consulting Group, 1989
available at: http://www.bcg.com/publications/publication_view.jsp?pubID=717&
language=English.
3. Philip Stern and Kathy Hammond, ‘The relationship between customer loyalty and purchase
incidence,’ Marketing Letters, 15 (2004) no 1, pp. 5–19.
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9736 MMST_C14.QXD 12/5/05 2:58 PM Page 426
4. This draws on ‘A study of CSR in the modern commercial environment’, project undertaken
by A. Hundal, WBS, 2005.
5. A. Hill, ‘Shoppers buy value, not values’, the Observer, Sunday 1 October 2000.
6. A. White, ‘Lost in transition? The future of corporate social responsibility’, The Journal of
Corporate Citizenship, 16 (2004), p. 19.
7. G. Lantos, ‘The ethicality of altruistic corporate social responsibility’, The Journal of Consumer
Marketing, 19, no 2/3 (2002), pp. 595–630.
8. http://www.christian-aid.org.uk/indepth/0401csr/index.htm
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Further reading
This conclusion provides the reader who wishes to pursue specific areas with sug-
gested books and journal articles. Theory and practice are in continual development
and some of the recent contributions are listed abut there are also older books and
articles which are included because they have easily stood the test of time and retain
their relevance.

This chapter looks at the most important tasks of senior managers in today’s environ-
ment. By far the most influential and accessible author on these topics is Peter F.
Drucker. His authoritative Management: Tasks, responsibilities, practices (New York:
HarperBusiness, 1993) is essential reading. Management Challenges for the 21st Century
(New York: HarperBusiness, 2001) is a fascinating review of the impact of changes in
government, economics and society on business. Drucker’s contribution is neatly
summarised in The Essential Drucker: The Best of Sixty Years of Peter Drucker’s Essential
Writings on Management (New York: HarperBusiness, 2003)
Tom Peters and Robert H. Waterman’s In Search of Excellence was originally published
in 1982 and triggered a new interest in the management literature and, in particular,
the characteristics of successful companies. A new edition of their book which incor-
porates new material has been recently published (New York: HarperBusiness, 2004)
A European perspective covering parallel topics is Hermann Simon, Hidden Champions
Much of the corporate strategy literature touches on these topics. Among the best are
Gerry Johnson and Kevan Scholes, Exploring Corporate Strategy (Hemel Hempstead:
Prentice Hall, 2003); Richard Whittington, What is Strategy and does it Matter?
(London: Thompson Learning EMEA Higher Education, 2000); and Robert S. Kaplan
and David P. Norton, The Strategy-focused Organisation (Boston, MA: Harvard Business
School Press, 2000). These authors developed the ‘Balanced Scorecard’ approach
which has been extended by others, for example Paul R. Niven, Balanced Scorecard
Diagnostics: Maintaining Maximum Performance (New York: Wiley, 2005).
The issue of stakeholder constraints is discussed in G. E. Greenley and G. R. Foxall,
‘Consumer or nonconsumer stakeholder orientation in UK companies’, Journal of
Business Research, July 1996, pp. 433–43; Nigel Piercy, Market-led Strategic Change
(Oxford: Butterworth-Heinemann, 2001) and J. S. Harrison and C. H. St John, Strategic
Management of Organisations and Stakeholders (London: Thompson Learning, 1998).
A comprehensive approach to the financial view of strategy is Richard A. Brealey and
Stewart C. Myers, Principles of Corporate Finance (New York: McGraw-Hill, 2005).
International aspects are covered in Isobel Doole and Robin Lowe, International
Marketing Strategy: Analysis, Development and Implementation (London: Thompson
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9736 MMST_Z01.QXD 12/5/05 3:00 PM Page 428
Fu r t h e r r e a d i n g
Learning, 2004). Current thinking on diversified companies is reflected in Michael

Gold and Kathleen Summers Luchs, Managing the Multibusiness Company (London:
Routledge, 1996).
Chapter 2 The customer-led business

This introduces the marketing concept and the issues in creating a customer-led business.
In modern times the best-selling and most influential graduate textbook on market-
ing has been written by Philip Kotler, his prime text is now co-authored with Kevin
Lane Keller, Marketing Management (Englewood Cliffs, NJ: Prentice Hall, 2005). A com-
pendium of essays on the current state-of-the-art by European academics is Michael J.
Baker (ed.), The Marketing Book, 5th edn (Oxford: Butterworth-Heinemann, 2002).
A considerable literature has arisen seeking to define the precise organisational and
behavioural characteristics of a market-oriented business. Among the most influential
contributions are G. S. Day, ‘The capabilities of market driven organisations’, Journal
of Marketing, October 1994, pp. 37–52; B. Jaworski and A. Kohli, ‘Market orientation:
antecedents and consequences’, Journal of Marketing, July 1993, pp. 53–71, and J. C.
Narver and S. F. Slater, ‘The effect of a market orientation on business performance’,
Journal of Marketing, October 1990, pp. 20–35. A recent review of the field can be
found in Ahmet H. Kirca, Satish Jayachandran and William O Bearden, ‘Market orien-
tation: a meta-analytic review and assessment of its antecedents and impact on
performance’, Journal of Marketing, April 2005, pp. 24–43. How to create a marketing
culture is well presented in Nigel Piercy, Market-led Strategic Change, 2nd edn (Oxford:
Butterworth-Heinemann, 2001). Relationship marketing is covered in Frederick F.
Reichheld, Loyalty Rules!: How today’s leaders build lasting relationships (Boston, MA:
Harvard Business School Press, 2003), and also Martin Christopher, Adrian Payne and
David Ballantyne, Relationship Marketing: Creating stakeholder value (Oxford:
Butterworth-Heinemann, 2001). The origins of relationship marketing lie in
European and particularly Scandinavian research into business markets. For a good
review see David Ford, Understanding Business Markets, 2nd edn (London: Dryden,
1997) and D. I. Ford, Lars-Erik Gadde, Hakan Hakansson and Ivan Snehota, Managing
Business Relationships (Chichester: Wiley, 2003). Finally, for the implications of the
Internet and new information technology see Kirthi Kalyanam and, Ward Hanson,
Principles of Internet Marketing (Cincinnati, OH: South Western, 2005).

The central technical skills of the marketing manager are in segmentation and
positioning.
Marketing planning is well covered in Sally Dibb, Lyndon Simkin and John Bradley,
The Marketing Planning Workbook (London: Routledge, 1996). Most of the marketing
textbooks also cover the subject.
The techniques of market segmentation are presented in detail in Malcolm
McDonald and Ian Dunbar, Market Segmentation: How to do it, how to profit from it
(Oxford: Butterworth-Heinemann, 2004). The most detailed book on segmentation
techniques is Michel Wedel and Wagner A. Kamakura, Market Segmentation:
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Conceptual and Methodological Foundations (Antwerp: Kluwer, 2000). Presentation of

the techniques of segmentation are in Philippe Naert and Peter Leeflang, Building
Models for Marketing Decisions (Antwerp: Kluwer, 2003) and Gary L. Lilien, Philip
Kotler and K. Sridhar Moorthy, Marketing Models (Englewood Cliffs, NJ: Prentice Hall,
1995). Some problems associated with segmentation are detailed in S. Dibb and P.
Stern, ‘Questioning the reliability of market segmentation techniques’, Omega, Int. J.
Mgmt Sci., 23, no. 6 (1995), pp. 625–36.
Positioning and competitive advantage are discussed in Michael Porter’s influential
book Competitive Advantage (New York: Free Press, 2004). Also see George S. Day and
Robin Wensley, ‘Assessing advantage: a framework for diagnosing competitive superi-
ority’, Journal of Marketing, April 1988, pp. 1–20, and more recently David Lei and
John W. Slocum Jr., ‘Strategic and organisational requirements for competitive advan-
tage’, Academy of Management Executive, February 2005, pp. 31–46. Positioning from
an advertising perspective is in Al Ries and Jack Trout, Positioning: The battle for your
mind (New York: McGraw-Hill, 2001).
The contrary view of segmentation is based on empirical research and interested
readers might consult Rachel Kennedy and Andrew Ehrenberg, ‘There is no brand
segmentation’, Marketing Insights, Marketing Research, Spring 2001, American
Marketing Association pp. 4–7.

The fundamentals of modern strategic market planning were first comprehensively
presented by Igor Ansoff. See his Corporate Strategy, revised edn (Harmondsworth:
Penguin, 1988). The next key works are Michael Porter’s Competitive Strategy:
Techniques for analysing industries and competitors (New York: Free Press, 2004) and his
Competitive Advantages: Creating and sustaining superior performance (New York: Free
Press, 2004). An excellent collection of papers on strategic marketing is H. I. Costin
and H. A. Vanolli, Classic Readings in Strategy (London: Dryden, 1997). Graham J.
Hooley, John Saunders and Nigel Piercy, Marketing Strategy and Competitive Positioning,
3rd edn (Hemel Hempstead: Prentice Hall, 2003) is also strongly recommended.
Besides the familiar Harvard-type case studies, there are now some excellent com-
puter simulations that allow managers to practise strategic market planning. The best
known of these is Jean-Claude Larreche and Hubert Gatignon, Markstrat: A marketing
strategy game, 6th edn (Palo Alto, CA: Scientific Press, 2000).
Hugh Davidson’s Offensive Marketing (Harmondsworth: Penguin, 1997) is a good prac-
tical work, particularly aimed at consumer markets.

There have been numerous articles about the product life cycle. A well-known one is
Theodore Levitt, ‘Exploit the product life cycle’, Harvard Business Review, October–
November 1965, pp. 81–94. Some others are cited in the references to this chapter
and a recent article worth reading is Youngme Moon, ‘Break free from the product
life cycle’, Harvard Business Review, May 2005, pp. 86–95.
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The most important treatment of the more general concept of market dynamics is in
Michael E. Porter, Competitive Strategy: Techniques for the analysing industries and com-
petitors (New York: Free Press, 2004). Many of the issues are also covered in George S.
Day, Market-driven Strategy (New York: Free Press, 1999).
Three interesting articles which consider various aspects of market evolution are:
Anita Elberse and Jehoshua Eliashberg, ‘Demand and supply dynamics for
sequentially released products in international markets: the case of motion pictures’,
Marketing Science, Summer 2003, pp. 329–54.
Jacob Goldenberg, Barak Libai and Eitan Muller, ‘Riding the saddle, how cross-market
communications creates a major slump in sales’, Journal of Marketing, April 2002,
pp. 1–16.
Debrabata Tulukdar, K. Sudhir and Andrew Ainslie, ‘Investigating new product
diffusion across products and countries’, Marketing Science, Winter 2002, pp. 97–114.
Alan Morrison, and Robin Wensley provide an interesting analysis of the BCG matrix
in ‘Boxing up or boxed in? A short history of the Boston Consulting Group
Share/Growth Matrix’, Journal of Marketing Management, April 1991, pp. 105–40.
Robert D. Buzzell and Bradley T. Gale, The PIMS Principles: Linking strategy to perform-
ance (New York: Free Press, 1987) has some fascinating and influential data on how
different competitive strategies affect the financial performance of the company.
More recently Buzzell reviewed the programme in Robert D. Buzzell, ‘The PIMS pro-
gram of strategy research: A retrospective appraisal’, Journal of Business Research,
May 2004, pp. 478–84.

The literature on brands has grown rapidly in recent years. Probably the most com-
prehensive works are David A. Aaker and Erich Joachimsthaler, Brand Leadership (New
York: Free Press, 2000) and Kevin Lane Keller’s Strategic Brand Management (Englewood
Cliffs, NJ: Prentice Hall. 2002). Another review, focused particularly on advertising
and fast-moving grocery products, is John Philip Jones and Jan S. Slater, What’s in a
Name? Advertising and the concept of brands (New York: ME Sharpe, 2003). J.-N.
Kapferer’s The New Strategic Brand Management (London: Kogan Page, 2004) has some
real insights into brands.
An interesting collection of papers on branding by European contributors is in a special
issue of the International Journal of Research in Marketing, March 1993, edited by Patrick
Barwise. Leslie de Chernatony’s paper ‘Categorizing brands: evolution processes under-
pinned by two key dimensions’, Journal of Marketing Management, April 1993, pp.
173–88, provides an interesting perspective again using European examples.
Naomi Klein’s book No Logo (London: Picador, 2002) presents a cultural criticism
of branding.
There have also been some sceptical assessments of the value of brands. A. S. C.
Ehrenberg, Repeat Buying: Theory and applications available from:
http://www.empgens.com/A/rb/rb.html, presents the theoretical reservations.
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Most of the textbooks have a chapter on innovation, although many of them look a
bit old-fashioned for today’s fast-pace environment. The new emphasis is well
described by George Stalk and Thomas M. Hout, Competing Against Time (New York:
Simon & Schuster, 2003) and in Robert Cooper, Winning at New Products: Accelerating
the Process from Idea to Launch (New York: Perseus, 2001). A broad perspective is con-
tained in Peter Drucker, Innovation and Entrepreneurship (London: Heinemann, 1985).
Good comprehensive discussions of the literature are available in J. Tidd, J. Bessant
and K. Pavitt, Managing Innovation (Chichester: Wiley, 2001) and Susan Hart, ‘New
Product Development’, in M. J. Baker (ed.), The Marketing Book, 5th edn (Oxford:
Butterworth-Heinemann, 2002).
An interesting discussion of the significance of innovation to marketing strategy is in
Kenneth Simmonds, ‘Marketing as innovation: the eighth paradigm’, Journal of
Management Studies, September 1986, pp. 479–500. The creative process in innovation is
presented in Simon Majaro, The Creative Process (London: Allen & Unwin, 1991). The
role of employees is discussed in Hirotaka Takeuchi and Ikujiro Nonaka, The Knowledge
Creating Company (Oxford: Oxford University Press, 1996). A recent analysis which
looks at generational effects is Peter J. Danaher, Bruce G.S. Hardie and William P. Putsis
Jr., ‘Marketing-mix variables and the diffusion of successive generations of a technologi-
cal innovation’, Journal of Marketing Research, November 2001, pp. 501–15 and methods
in innovation are considered in Vijay Mahajan, New-product Diffusion Models
(International Series in Quantitative Marketing) (Antwerp: Kluwer, 2000).

One of the most comprehensive reviews of pricing issues and techniques is N. Henna
and R. Dodge, Pricing: Policies and procedures (New York: NYU Press, 1995). Another
insightful and practical approach to common pricing problems is Robert J. Dolan and
Herman Simon, Power Pricing (New York: Simon & Schuster, 1997).
Some good articles by European authors are Martin Christopher, ‘Value-in-use pric-
ing’, European Journal of Marketing, November 1982, pp. 35–47, Gordon R. Foxall, ‘The
logic of price decision-making’, Management Decision, November 1980, pp. 235–45,
and Herman Simon, ‘Pricing opportunities: how to exploit them’, Sloan Management
Review, Winter 1992, pp. 55–65.
The mathematical techniques that can be used for estimating price elasticities are pre-
sented in Leonard J. Parsons and Randall L. Schultz, Marketing Models and Econometric
Research, 2nd edn (New York: North Holland, 1990). A simpler version is G. L. Lilien,
P. Kotler and K. S. Moorthy, Marketing Models (Englewood Cliffs, NJ: Prentice
Hall,1995). An example of empirical pricing research is Venkatesh Shankar and Ruth
N. Bolton, ‘An empirical analysis of determinants of retailer pricing strategy’,
Marketing Science, Winter 2004, pp. 28–50.
For consideration of pricing and value see Peter Doyle, Value-Based Marketing: Marketing
Strategies for Corporate Growth and Shareholder Value (Chichester: Wiley, 2000).
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A good MBA-type text is Larry Percy and Richard Elliott, Strategic Advertising
Management (Oxford: Oxford University Press, 2001).
Three excellent books by practitioners that give a feeling of how the top companies
and agencies plan advertising and communications in practice are: Judith Corstjens,
Strategic Advertising: A practitioner’s handbook (Oxford: Heinemann, 1990); Simon
Broadbent, Spending Advertising Money (London: Business Books, 1985); David Ogilvy,
Ogilvy on Advertising (London: Pan, 1983).
On other forms of promotion and communications, the best analytical treatment is
Robert C. Blattberg and Scott A. Neslin, Sales Promotion: Concepts, methods and strate-
gies (Englewood Cliffs, NJ: Prentice Hall, 1990). A practical and rigourous book is
John Totten and Martin Block, Analyzing Sales Promotion (Chicago, IL: Dartnell, 1994).
On direct marketing see Drayton Bird, Commonsense Direct Marketing (London: Kogan
Page, 2000).

Two good and comprehensive textbooks are D. J. Dalrymple et al., Sales Management
(New York: Wiley, 2004) and T. N. Ingram, R. W. LaForge and C. H. Schwepker, Sales
Management: Analysis and decision-making (Mason, OH: South Western College
Publishing, 2003).
More complex selling is well treated in Robert B. Miller, Stephen E. Heiman and Tad
Tuleja, Strategic Selling (New York: Kogan Page, 2003).
The best book on negotiation is Roger Fisher and William Ury, Getting to Yes:
Negotiating agreement without giving in, 2nd edn (New York: Random House, 2003).

The most widely used textbook is Louis W. Stern and Adel I. El-Ansary, Marketing
Channels (Englewood Cliffs, NJ: Prentice Hall, 2001). Another good managerially-
oriented work is Bert G. Rosenbloom, Marketing Channels (Cincinnati, OH: South
Western, 2003).
A useful and well respected European perspective is Martin Christopher, Logistics and
Supply Chain Management: Creating value – adding networks (Hemel Hempstead: Prentice
Hall, 2005).The trend towards strategic alliances, partnerships and more complex
channels is discussed in R. T. Moriarty and U. Moran, ‘Marketing hybrid marketing
systems’, Harvard Business Review, November–December 1990, pp. 146–57, and R. S.
Achrol, ‘Evolution of the marketing organisation’, Journal of Marketing, October 1991,
pp. 77–87. Some recent articles of note include C. Sophie Lee and Wesley Shu, ‘Four
models of internet-enabled distribution structures’, Information Systems Management,
Summer 2005, pp. 14–23, and Zhiqi Chen, ‘A theory of international strategic
alliance’, Review of International Economics, November 2003, pp. 758–70.
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There is a great deal now being written about the service sector. A classic and stimu-
lating review of the key issues is John E. G. Bateson, Managing Services Marketing, 2nd
edn (New York: Dryden, 1997). Another useful guide is Jeffrey Pfeffer, Competitive
Advantage through People (Boston, MA: Harvard University Press, 1996). Some innova-
tive insights about building high-powered service organisations are in Leonard L.
Berry, Marketing Services: Competing through quality (New York: Simon & Schuster,
2004). A European perspective can be found in Adrian Palmer, Principles of Services
Marketing (New York: McGraw-Hill, 2004)
On non-profit organisations, two good books are Adrian Sargeant, Marketing
Management for Non-profit Organisations (Oxford: Oxford University Press, 2004) and
Philip Kotler and Alan Andreasen, Strategic Marketing for Non-profit Organisations
(Englewood Cliffs, NJ: Prentice Hall, 1996) and D. Z. Rodos, Marketing for Non-profit
Organisations (New York: Random House, 1981).
Chapter 13 Turnaround management

In today’s rapidly changing environment, many firms fail to adapt decisively and pay
the penalty in terms of declining sales and profit performance. New management are
then brought in to produce a turnaround.
The accounting principles are covered in C. T. Horngren, G. Foster and S. M. Daton,
Cost Accounting: A management emphasis, 12th edn (Upper Saddle River, NJ: Prentice
Hall, 2005) and C. Drury, Management and Cost Accounting for Non-accounting Students
(London: Thompson Learning, 2004).
A real insight into how some companies manipulate their accounts to disguise grow-
ing financial problems is given in Terry Smith, Accounting for Growth: Stripping the
camouflage from company accounts (London: Century Business, 1996). For modern
approaches to using management accounting information for strategic decision
making, see Tony Hope and Jeremy Hope, Transforming the Bottom Line (Boston, MA:
Harvard Business School Press, 1996) and R. S. Kaplan and D. P. Norton, The Strategy-
focused Organisation (Boston, MA: Harvard Business School Press, 2000).
Turning to transformation, recent research is reviewed in Thomas E. Vollman, The
Transformation Imperative: Achieving market dominance through radical change (Boston,
MA: Harvard University Press, 1996). Other useful insights are John P. Kotter, Leading
Change (Boston, MA: Harvard University Press, 1996), R. M. Kanter, B. A. Stein and T.
D. Jick, The Challenge of Organisational Change: How companies experience it and leaders
guide it (New York: Free Press, 2003) and R. M. Kanter, When Giants Learn to Dance:
Mastering the challenges of strategy, management and careers in the 1990s (London:
Unwin, 1990). The classic text on technology and change is Michael Tushman and
Philip Anderson, Managing Strategic Innovation and Change (New York: Oxford
University Press, 2004). Finally, Peter Doyle, Value-based Marketing: Marketing strategies
for corporate growth and shareholder value (Chichester: Wiley, 2000) looks at turn-
around management from the shareholder value perspective.
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This chapter looks at the changing marketing environment and how it is likely to
influence marketing strategy and actions in the future.
There are many books that aim to predict trends. Perhaps not surprisingly this is an
area of fads and fashions, so the reader is advised to get the latest editions! Tom Peters’
latest book Re-Imagine (London: Dorling Kindersley, 2004) is an effort to show how
business is changing and how managers should address these changes. Hamish McRae’s
The World in 2020 (Boston, MA: Harvard Business School Press, 1996) has some insight-
ful views about trends. Gary Hamel’s Leading the Revolution: How to thrive in turbulent
times by making innovation a way of life (Boston, MA Harvard Business School Press,
2002) is another popular, ‘inspirational’ book on twenty-first century management.
Another influential book on shaking up big companies is Rosabeth Kanter’s When
Giants Learn to Dance (New York: Simon & Schuster, 1989). More technical books that
have had a big impact are Michael Hammer and James Champy, Re-engineering the
Corporation (New York: HarperBusiness, 2004), George Stalk and Thomas M. Hout,
Competing Against Time (New York: Free Press, 1993) and James C. Collins, Jerry I. Porras
and Jim Collins, Built to Last: Successful habits of visionary companies (New York:
HarperBusiness, 2004). The human implications of these changes are brilliantly
analysed in Charles Handy, The Age of Unreason (Boston, MA: Harvard Business School
Press, 1990). More of an economist’s approach to these issues is interestingly presented
by Michael J. Mandel, Rational Exuberance: Silencing the enemies of growth and why the
future is better than you think (New York: HarperBusiness, 2004). Finally, there is a raft of
books dealing with the implications of technology including Peter J. Denning, The
Invisible Future: The seamless integration of technology in everyday life (New York: McGraw-
Hill, 2005). Some interesting classics include Larry Downes and Chunka Mui, Unleasing
the Killer App (Boston, MA: Harvard Business School Press, 1998); Philip Evans and
Thomas S. Wurster, Blown to Bits (Boston, MA: Harvard Business School Press, 2000);
and Bill Gates, Business at the Speed of Thought (London: Penguin, 2001).
Turning more specifically to marketing, a good review is Frederick E. Webster, ‘The
changing role of marketing in the corporation’, Journal of Marketing, October 1992,
pp. 1–17. Douglas Brownlie, Mike Saren, Robin Wensley and Richard Whittington
edited a collection of writings looking at some of the issues facing the disciple in
Rethinking Marketing (London: Sage, 1999).
A recent book which looks at the problems facing marketing companies today is
Nirmalya Kumar, Marketing as Strategy: Understanding The CEO’s Agenda for Driving
Growth and Innovation (Boston, MA: Harvard Business School Press 2004).
For an excellent review of the empirical patterns found in markets and the realities of
brand loyalty see Andrew S. C. Ehrenberg, Mark D. Uncles and Gerald J. Goodhardt,
‘Understanding brand performance measures: using Dirichlet benchmarks’, Journal of
Business Research, 57, no. 12 (2004), pp. 1307–25.
An excellent summary of relevant articles on CSR can be found in Bernd R. Oswald,
HBR on Corporate Responsibility (Boston, MA: Harvard Business School Press, 2003).
Two other relevant texts are those of Philip Kotler and Nancy Lee, Corporate Social
Responsibility: Doing the most good for your company and your cause (New York: Wiley,
2005) and Rosabeth Moss Kanter (Foreword), Shirley Sagawa and Eli Segal, Common
Interest, Common Good: Creating value through business and social sector partnerships
434
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Author index
Alexander, M. 101 Fadell, Tony 414

Allen, 197, 212 Fellows, P. 244
Ansoff, H.I. 96 Financial Times 7, 98
Fisher, R. 314–15
Bain & Company 49 Forbis, J.L. 234
Bainbridge, J. 283 Ford, Henry 38
Bakker, Peter 422–4 Freud, 32, 254
Baron, S. 243–4
Bashford, S. 282 Gallant, S. 327
Bateson, J.E.G. 367 Gates, Bill 20, 199, 404
Bernbach, Bill 247 Goold, M. 101
Berry, L.L. 355 Grove, Andy 93
Blackwell, R.D. 335
Blanchard, K. 347 Haley, R.I. 69
Blois, K.J. 368 Hamel, G. 23, 24, 25, 400–2
Booz 197, 212 Hamilton, 197, 212
Boston Consulting Group 44, 107–10, 132, Herzberg 32, 254
146, 418 Heskett, J.L. 360, 363
Brandicourt, O. 244 Heygate, R. 379
Branson, Richard 17, 124, 404 Hill, A. 420
Brown Howard 282–3 Hugo, Victor 195
Buffett, Warren 418
Burnett, K. 294 Jobs, Steve 404
Campbell, A. 101 Kadaner, H. 327

Campbell, R. 282 Kagona 9
Carlson, Chester 215 Kane, E.R. 145
Carlzon, Jan 42, 45, 55, 57 Kapfferer, J.-N. 170
Carothers, W.H. 144 Koliat, D.J. 335
Caudwell, J. 305 Kotler, P. 154, 156–7
Chernatony, L. de 167
Christensen, C. 205–6 Lantos, G. 420
Christman, E. 327 Lee, M.M. 334
Clauswitz, K.M. von 151 Levitt, Theodore 5, 38, 63, 105, 167, 168, 175,
Collins, J.C. 2 349, 358
Corona, B. 328 Liddell-Hart, B.H. 151, 157
Crook, C. 421
Crosby, P. 355 McDonald, M.H.B. 167, 299
Major, Bob 213
Dalrymple, D.J. 343 Marshall, Sir C. 225
Davies, G. 382 Maschler, T. 279
Davison, I.H. 4 Maslow, A.H. 32, 168, 254
Dichter, 254 Maynard, A. 244
Doyle, P. 9 Medawar, C. 244
Drucker, P.F. 31, 38, 48, 107, 223, 319, 375, Mehta, N.T. 234
399, 409 Michman, R.D. 332
du Pont, Irénée 144 Montcrief, W.C. 288
Morissette, Alanis 326–7
Ebbers, Bernie 419 Morris, James 423
Elton, John 327
Emery, A. 131 Nicholson, R. 244
435
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 436
Author index
O’Leary, Michael 56 Shostack, G.L. 349, 364

Olson, Ken 208 Shroff, G. 290
Sibley, S.D. 332
Packard, D. 48 Simenoff, C. 243
Parasuraman, A. 355 Singh, R. 154, 156–7
Parsons, L.J. 343 Smith, Adam 32
Patton, B. 315 Steinbrecher, Dr D. 266
Peters, T.J. 2, 127 Stevenson, Robert Louis 287
Porras, J.I. 2 Stine, Charles 144
Porter, M.E. 83, 115–16, 122, 140, 148, 412
Prahalad, C.K. 23, 24, 25, 400–2 Urry, W. 314–15
Queich, J.A. 277 Vaughn, R. 257

Von Hippel, E. 290
Rappaport, A. 112
Raynor, M. 206 Waterman, R.H. 2, 127
Reichheld, F.F. 49 Welch, John 1
Reinertsen, D.G. 205
Revson, Charles 42, 349 Yale, J.P. 143
Robeson, J.F. 335
Zeithami, V.A. 355
Semlow, W.J. 297
Shapiro, B.P. 369
436
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 437
Company index
ABB 160, 302 Cadbury-Schweppes 101, 136, 153, 164,

Abbey 170 166–7, 177–8, 181–2, 230, 420
ADVFN 417 Calvin Klein 153
AEG 385 Canada Dry 192
AIG 3, 4 Canon 22, 113, 155, 203, 214
Akzo Nobel 293 Carlsberg 103, 248
Aldi 122 Carlton Communications 4
Allied Domecq 163 Carrefour 296
Altria 3, 196 Casio 24, 175, 198, 202, 400
Amazon.com 56, 203 Castrol 76, 122, 349–50
American Airlines 124 Caterpiller 20, 23
American Express 67, 68, 113, 122, 165, 240 Chivas Regal 84, 229
Amstrad 181, 230 Christian Aid 374, 422
AOL-Time Warner 114 Cicso Systems 3, 65, 98, 165, 167, 199
Apple 81, 122, 133, 138–9, 159, 214, 402, Citibank 165
404, 414 Citigroup 3, 401
Arm & Hammer 184, 198 Citroën 167
Asda 122
Claridges 159
Aston Martin 160, 201, 230
Co-op 122
AstraZeneca 401
Coca-Cola 3, 22, 24, 74, 75, 81, 134, 153, 165,
Atlantic Records 328
167, 174, 178, 181, 196, 241–2, 364, 405,
ATT 139
415–16, 420
Aventis Pharmaceuticals 336
Colgate Palmolive 192
Combined English Stores 382
Bang & Olufsen 199, 230
Compaq 95
Bank of America 3
Credit Suisse 293
Bass 361
Bayer 147
DEC 159, 208
BBC 280, 416
Dell 8, 15, 53.65, 95, 98, 150, 173, 182, 198,
Bell Labs 197
Benedicta 154 333, 418
Benetton 333 DHL 150
Berkshire Hathaway 3 Diageo 66, 68, 240
Best Buy 327 Direct Line 198, 333, 405
Bic 230 Disarm Trust 419
Black & Decker 42, 185 Disney 165
BMW 14, 81, 159, 165, 199, 232 Docutel 95
Body Shop 84, 94, 169, 175, 185 Du Pont 144–6, 230, 336
Boeing 14, 22 Dunhill 85, 103, 182
Booker Brothers 279–80 Duracell 94
British Airports Authority 76
British Airways 42, 47, 56, 74, 124, 232, easyJet 55
385, 416 eBay 44, 417
British Petroleum 3 Electrolux 101, 181
British Telecom 186 Electronic Data Systems 400
Brooks brothers 366 EMI 327
BTR 101 Enron 419
Burmah Castrol 401 Ericsson 98
Burroughs 95 Ever Ready 94
Burton Retail Group 90 Exxon Mobil 3
437
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 438
Company index
Federal Express 22, 44, 53, 150, 174 Levi 181

Ferrari 160 Lilly Pharmaceuticals 137
Fiat 167 Live Aid 280
Financial Times 160, 167, 184, 280–1 London Taxis International 122
First Direct 139, 159, 171–2 L’Oréal 101
Flextronics 98, 199 Lucozade 198
Fonterra 213
Ford Motors 41, 74, 75, 159, 165, 181, 184, McDonald’s 17, 165, 184, 232, 333, 416, 420
214, 370 McKinsey Group 110, 122, 126, 132, 174,
204, 240, 379, 392, 403
GEC 101 Man Group 280
General Electric 3, 8, 22, 57, 99, 165, 185, Marks & Spencer 20, 94, 122, 280, 366, 370,
196, 203, 212, 214, 307, 398 383
General Mills 164 Marlboro 165, 416
General Motors 20, 94, 159, 203, 336 Mars 53, 58–9, 113, 136, 174, 176, 179, 183,
Gillette 163, 165, 174 185, 202, 230, 256, 320
GlaxoSmithKline 3, 67, 103, 150, 184, 198, Matsushita 166, 389
244, 302, 400–1, 412 MCI Corporation 419
Gnutella 326 Mercedes-Benz 67, 68, 123, 159, 165, 168,
Goodyear 232 181–2, 196, 231
Gucci 160 Merck 138, 207, 214, 243, 398
Guinness 168 Michelin 232
Microsoft 3, 20, 57, 113–14, 165, 167, 181,
Häagen-Dazs 76, 320 199, 205, 307, 404
Halifax 282–3 Midland Bank 164, 171
Hanson Trust 94, 101 Milliken 44
HBOS (Halifax) 152 Monsanto 146
Heineken 248 Mont Blanc 160
Hennes & Mauritz 336 Morrisons 122
Hermes 81 Motorola 141, 389
Hertz 416
Hewlett-Packard 7, 48, 90, 98, 158, 165, 168, NCR 95
208, 214, 232, 337 NEC 24
HMV 326, 327 Nestlé 83, 101, 122, 136, 153, 174, 178–9,
Honda Motors 24, 27, 165, 184, 196, 188, 232, 302
198–200, 203 Netto 122
HSBC 3, 164, 171 NEXT 382
Nike 64, 81, 83, 199, 420
IBM 3, 8, 20, 42, 84, 95, 98, 101, 114, 138, Nintendo 51–2, 199, 202
159, 165, 167, 182, 205, 214–15, 307, 326, Nissan 185
331, 385, 416 Nokia 20, 21, 150, 165, 184, 196, 199
ICI 17, 337 Northern Rock 170–1
IKEA 122, 150, 336 Novartis 3, 232
Intel 3, 134, 165, 167, 290–1 Novo 150
NTT Docomo 3, 349
J Hepworth 382
Jaguar Cars 57, 75, 159, 181 Oakley 54
Johnson & Johnson 3, 179, 184, 216 OpenNap 326
Oracle 167
Kellog’s 166, 168, 174, 182, 190, 420 Otto Versand 382
Kodak 20, 146, 152, 155, 197, 214
Komatsu 22, 23, 53 PanAm 124
Kwiksave 122 Partygaming 417
Pepsi Cola 45, 47, 167, 178, 401, 405
Laker Airlines 124 Pernod-Ricard 163
Leica 155 Perrier 160
Lenovo 326 Peugot 167
438
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 439
Company index
Pfizer 3, 156, 243–4, 383, 403 Southwest Airlines 55

Philips Electronics 15, 20, 64, 166, 186, 336, Starbucks 326–7
385, 414 Stella Artois 248
Phones 4 U 305 Sterling Pharmaceuticals 147
Porsche 180, 199, 232 Stew Leonard 72
Prentice Hall 55 Sunkist 164
Pricefighter 122 Swatch 199, 202, 232
Procordia 103 Swissair 47
Proctor & Gamble 3, 14, 52, 138, 146, 163,
166, 180, 182, 192, 281, 336, 398, 403 Tesco 41, 52, 64, 68, 122, 139, 153, 174, 182,
184, 417–18
Ralph Lauren 182 Texas Instruments 20, 175, 230
Rank 215 Thermalite 175
Realnetworks 414 3M 23, 44, 101, 103, 146, 202, 208, 212, 214
Reebok 180, 182, 419 TNT Express 150, 335, 400, 422–4
Renault 293 Tomkins 38
Reuters 184 Toshiba 114
Revlon 42, 349 Total 3
Rolex 42, 81, 159, 168, 199, 417 Toto 202
Rollei 155 Tower 326
Rolls-Royce 169, 302 Toyota Motor 3, 53, 57, 103, 123, 125, 165,
Rover Cars 164 181, 198, 201, 203, 212, 231, 331, 336, 401
Rowntree 188 TWA 124
Royal Dutch/Shell 3, 14, 422 Tyco 103
Rubbermaid 208
Ryanair 55–6, 122 Unilever 14, 101, 135, 153–4, 166, 185–6,
281, 302, 320, 399
Saatchi & Saatchi 5, 94 Upjohn 208
Safeway 242
Sainsbury 94, 122, 296 Virgin 17, 166, 280, 326, 404
Salvation Army 371 Virgin Atlantic 50, 76, 124, 416
Sanmina-SCI 98 Vodaphone 3
Scandinavian Airlines (SAS) 42, 45, 55, 57 Volkswagen 74, 164, 184, 385
Schlitz 8 Volvo Cars 55, 84, 168, 184, 265
Sears 20
Sega 199 Waitrose 122
Seiko 175, 202 Wal Mart 3, 122
Shell Chemicals 110–11 Walls 320
Siemens 14, 114, 122, 181, 291 Warner Music 327
Sinclair 208 Whirlpool 186
Singapore Airlines 47 Wolf Olins 293
SKF 153 Woolworth 74, 164, 213
Skoda 164, 385 WorldCom 419
Smart Cars 232
SmithKline Beecham 4, 149, 172 Xerox 44, 174, 208, 214
Solectron 98
Sony Corporation 22, 44, 114, 122, 165, 167, Yamaha 180, 200, 202
168, 181–2, 197, 199–200, 208, 325, 402 YKK 230
439
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 440
Subject index
account management structure of growth of 179

salesforce 296 and innovation 201
account relationships, managing 316–17 life cycle of 135
action plans 126 management, conflicts in 190–2
added value of brands 166–72 positioning strategy 84–5, 169
analysis of 170–2 regional and global 186–7
measuring and planning 168–9 valuing 189
occurence of 168 budget
source of value 167–8 advertising 267–9
advertising planning 259–74 and shareholder value 269
budget, determining 267–9 bundled pricing 238
and direct response marketing 272–3 business analysis 216–17
effectiveness, evaluating 271–2 business unit strategy 117–27
media selection 270–1 competitor targets 120–5
message, developing 264–7 core strategy 125–6
objectives 261–4 customer targets 119–20
pre-testing 267 implementation 126–7
target audience 260–1 mission 117–18
agents 328 objectives 118
asset turnover (AT) 387, 388, 394–5 resource allocation 118
audience 250 strategic focus 118–19
Aufsichsrat 14 and transformational change 405–6
augmented brand 173–4 businesses, separation of 404
buyer behaviour 253–8
backward integration 18 motivation 253–5
balanced objectives, developing 14–17 roles 255–6
balanced scorecard 16–17 types 256–8
barter 34 bypass attack by market challenger 158
basic brand 172
BCG growth-share matrix 107–10 cash cows 108
benchmarking 207 category management 242
blocking products 238 change, adapting to 94–8
Booker Prize 279–80 environmental change, lags in response
brand acquisition 188–9 95–6
brand barrier 179 lags in strategic response, reducing 97–8
brand consistency 175–6 strategic windows 94–5
brand development 217 channel diplomacy 332
brand elimination 185–6 commission of salesforce 306
brand extensions 180 commitment-focused customers 72
brand leverage 178–9 commoditisation 416
brand productivity improvements 185 communications 248–9
brand repositioning 183–6 advertising planning 259–74
brand revitalisation 184 and buyer behaviour 253–8
brands 164–6 in distribution channels 340–1
added value of 166–72 interactive marketing 274–5
and advertising planning 262–4 messages 251, 252
benefits of 177–80 public relations 278–81
building 172–6 response process 252–3
buying vs building 188–9 sales promotion 275–8
erosion of 416 in services marketing 364
extensions 180–3 targeted 68
440
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 441
Subject index
communications mix 249, 281–4 education and training 56

communications process 250–2 financial orientation 38–9
attention 250–1 implementation of 56–7
interpretation 251–2 maintenance of 57–8
company brand 166 marketing audit 54–5
comparative advertising 265 mission 53–4
competition 138, 415 needs, focus on 42–4
competitive advantage 47–8 production orientation 37–8
and corporate mission 103 sales orientation 38
sustainable 19 strategy development 55–6
and transformational change 400 customer-led value creation 411
competitive benchmarking 47 customer loyalty 418–19
competitive environment 54 customer mix, improving 393
competitive intelligence system 124–5 customer needs 105
competitive scope 103 customer-oriented approach 308
competitive strategy 200 customer rationality 257
competitor benchmarking 214 customer satisfaction 8–9, 48
competitor targets 120–5, 232–3 customer scope 103
concentric diversification 18 customer segmentation 240
concept development 215–16 customer targets 119–20
conglomerate diversification 18 customers
consolidation phase 388–97 as assets 49–52
consumer market segmentation 70 distribution channels for 338–40
consumer markets 221–2 managerial implications of 51–2
consumer promotions 278 and market dynamics 137–8
contraction defence of market pioneer 153–4 in new product development process 212
conventional channels 329, 334 objectives of 13
core capabilities 413 retention and satisfaction of 50–1, 68
core competences 23–5 and salesforce 299–300, 303
and transformational change 398, 400 customers’ needs, matching 67
core segmentation 66–7 cycles of confusion 132–7
core strategy 125–6, 405
corporate branding 181 Daily Mirror 271
corporate development 114–17 Daily Telegraph 271
corporate flexibility 97 decision-making units 72
corporate objectives 103–5 demand 33, 134
corporate social responsibility (CSR) 419–24 differential advantage 78–84, 88, 149
corporate strategy 100–1 lack of 205
corporate development 114–17 and salesforce 292–4
mission 102–3 differentiated marketing 75
objectives 103–5 direct competitors 121
resource allocation 106–13 direct mail 272
strategic business units, defining 105–6 direct marketing 328
synergies, exploiting 113–14 direct response marketing 272–4
cost drivers 81–2 discounts, reduction in 240
cost-plus pricing 239–40 discrepancy of assortment 322
counter-offensive defence 153 discrepancy of quantity 323
creditors’ objectives-14 13 disruptive technologies 205–6
current technology curve 134 distribution channels
customer adoption of innovation 219–22 communication 340–1
innovator characteristics 221–2 conflict 331–3
market diffusion 220–1 intermediaries 330–1
product adoption 219–20 inventory management and control 342–4
customer-focused innovation 208–9 managing 330–3
customer involvement 256 order-processing 340–1
customer-led business 37–40, 52–9 organisation of 337–45
customer orientation 39–40 production decisions 341–2
441
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 442
Subject index
distribution channels (continued) geographical scope 103

transport management 344–5 geographically structured salesforce 294–5
warehouse decisions 341–2 global brands 186–7
distribution in services marketing 365–6 globalisation 415
diversification 18 gradual change 383–4
divesting 148 The Grocer 270
dogs 109 gross rating points 270
group pressure 251
early adopters 221 growth
early majority 221 marketing objectives 5–6
economic order quantity (EOQ) 342–4 and pricing 230
economic value to the customer (EVC) 65, guerrilla attack by market challenger 158
233–5, 240
economies of scale 82, 149 harvesting 148, 229
The Economist 270 headquarters, role of 404–5
emotional appeals 264 horizontal branding 180
empathy in salesforce 302 hybrid structure of salesforce 296
employees
in new product development process 212 image drivers 81
in non-business sector 369–70 implicit competitors 121
objectives 13 incentives to innovate 208
satisfying 10 incipient markets 43
encirclement attack 158 indirect competitors 121
encoding 250 individual brand 166
entire business 48 industrial change 398–400
escalation pricing 239 industrial markets 222
evolutionary change 383 industry 35
exchange 34 industry scope 103
exclusive distribution 325 infliction points 94
existing markets 43 information 208
exit barriers and price changes 241 initial prices, establishing 229–38
expectations, rising 415 competitor targets 232–3
objectives 229–31
fashionisation 414 perceived value 235–7
feedback 250 product mix pricing 237–8
and control systems 126 strategic focus 231
in non-business sector 375 target market segments 232
fighter brands 240 value to customer 233–5
financial control 101 innovation 9–10, 68
financial goals 88 barriers to 204–5
Financial Times 271, 280, 281 customer adoption 219–22
first-mover advantage 149, 174 customer-focused 208–9
first-tier suppliers 243 fast-track 200–1
fixed costs in turnaround 391 integration 210
flank attack by market challenger 157 meaning of 196–8
flanking defence of market pioneer 152 new product development process 210–19
flexibility in innovation 201 objectives 104
flux 384 opportunities 202–3
focused marketing 75–6 organising for 206–10
follow-on products 238 parallel processing in 209
forward integration 18 and price changes 241
franchise agreements 336 reasons for 198–201
frontal attack by market challenger 157 systems 209–10
and vision 207
gearing ratio (GR) 387, 388, 396–7 innovative segmentation 76
Generally Accepted Accounting Principles innovators 141, 220
(GAAP) 4 intended message 250
442
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 443
Subject index
intensive distribution 325 markets and capitalism 36–7

interactive marketing 274–5 needs and products 32–3
interest bargaining 314–16 primary function of business 48
intermediaries 322–3, 328, 330–1 tasks 37
internet 275, 417–18 theory of 32–7
inventory management and control 342–4 value and choice 33
marketing channels
joint membership 333 alternatives 328–9
just-in-time management 344 designing 324–30
evolution of 333–7
kieretsu 14 horizontal 331, 336
knowledge 208 low-cost 333–4
multichannel systems 331, 336–7
laggards 221 objectives 324–5
late majority 221 options, evaluating 329–30
latent markets 43 reliability 326
leadership 28 role of 321–3
and declining markets 148 strategy 325
of salesforce 303 vertical 329, 331, 334–6
and transformational change 398, 406–7 marketing concept 39, 410–11
lifetime value of customers (LVC) 41 marketing environment, changing 413–16
line extensions 180 marketing goals 87–8
long-term growth 5, 68 marketing mix 37, 88–9, 126
long-term improvements 380–2 price 364
low state of art innovation 222 product 363–4
in service industries 363–4
macro-environmental changes 87 and transformational change 405–6
management information systems 97 marketing network 35
managers’ objectives 12–13 marketing objectives 2–10, 87–8
market 35 growth 5–6
market-centred organisations 89–90 innovation and learning 9–10
market challenger strategy 154–8 operational 9
market development 18 profitability 3–5
market dynamics 137–40 marketing plan 85–9
competition 138 marketing planning 412–13
customers 137–8 marketing research 37
new entrants 139 marketing strategy 88, 149–58
substitutes 139–40 markets, evolution of 140–8
supply relationships 140 decline phase 143–8
market pioneer strategy 149–54 emerging 141–2
market segmentation 64–73, 411–12 high growth phase 142
bases for 69 mature phase 142–3
consumer 70 markets, innovation opportunities 202–3
core segmentation 66–7 media convergence 275
criteria 73 merchants 328
innovative 76 messages 251, 252, 271
multilevel 72–3 checklist 266–7
organisational 70–2 content 264
reasons for 67–9 developing 264–7
over time 76–8 format 265
market share 68–9, 104 source 265–6
and brands 177–8 structure 265
and innovation 203 micro-environmental changes 87
and pricing 229 micro-markets 414–15
market-structured salesforce 295–6 mission statement
marketing in business unit strategy 117–18
exchange and markets 34–5 in corporate strategy 102–3
443
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 444
Subject index
mission statement (continued) structure 26–7

in customer-led business 53–4 systems 27–8
in non-business sector 373 organisational market segmentation 70–2
mixed compensation of salesforce 306 organisational mission 15
mobile defence of market pioneer 153
monitoring 37 paradigm shifts 94
multibranding 180–3, 240 parallel imports 238
multichannel systems 331, 336–7 parallel processing in innovation 209
partnerships 330
need set 33 penetration pricing 230
needs 32, 69, 134, 196, 251 perceived value and pricing 235–7
negative brands 164 perception of technical change 222
negotiation 34 personnel drivers 80
position vs interest bargaining 314–16 physical product 164
pre-negotiation phase 313 planning systems, evolution of 98–101
and pricing 239 components of strategy 100–1
and selling process 312–16 hierarchy of strategies 100
strategy 314 portfolio analysis 403–4
style 314 portfolio models 110–12
types 312–13 portfolio planning 107, 109
new product development process 210–19 position defence of market pioneer 151–2
brand development 217 position in negotiation 314–16
business analysis 216–17 positioning strategy 84–5, 411–12
concept development 215–16 potential brand 174–6
corporate strategy 212 power shift in environment change 96
ideas 212–14 power transfers 98
launch 219 pre-emptive defence of market pioneer 153
roll-out 218 price changes 238–41
screening ideas 214–15 contracts and terms 239–40
test marketing 218 exit barriers 241
niche companies 123 innovation 241
and declining markets 148 sales team psychology 239
market strategy of 158–60 segmentation and positioning 240
non-business sector values vs products 240
characteristics of 370–2 price competitiveness 227–9
criticisms of 368–70 prices
feedback in 375 in marketing mix 364
funding of 371 raising 392–3
mission in 373 pricing strategies 231
monopoly power 371–2 problem children 108–9
performance measures in 374–5 problem solving 257–8
planning in 373 procrastination period in environment
services marketing in 368 change 95
systems for 372–5 product adoption process 219–20
nylon 144–6 product champions 210
product choice set 33
observation delay in environment change 95 product competitors 121
one-level channel 323 product curve 135
operational decisions on turnaround 388 product development 18, 37, 204–5
option pricing 238 product form 135
orchestrator 210 product life cycle 132–7
organisation 45–7, 126 brands in 179
moments of truth 45 weaknesses 135–7
right-side up 45–7 product line pricing 237
organisational dimensions 25–8 product mix, improving 393–4
leadership 28 product mix, pricing 237–8
strategy 27 product-structured salesforce 295
444
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 445
Subject index
productivity objectives 104 training 302–3

products 33, 164 sales-oriented approach 307
in marketing mix 363–4 sales promotion 275–8
salesforce, allocation to 300 sales volume, raising 392
products, new, failure of 204–5 salesforce 328
profilers 69 incentives for 239
profit objectives 104–5 managing 289
profits objectives 288–9
and brands 177–8 resources, allocation of 299–301
enhanced 67–8 size 297–8
importance of 4 strategy 290–4
and innovation 201 structure 294–6
in non-business sector 370 segment of one 418
and salesforce 292 selective attention 251
promotional channels 330 selective distribution 325
promotional planning 278 self-confidence in salesforce 302
prospects 309 selling process 307–12
public relations 278–81 approach 309–10
public sector mismanagement 372 closing 311–12
objections, handling 311
qualifying of prospects 309 pre-approach 309
quality leadersip 230 pre-close 310
quality product, brand as 172–3 presentation 310–11
prospects 309
radical change 383 relationships, maintaining 312
range branding 166 sender 250
rational appeals 264 service 416
recycling 421 service industries
regional brands 186–7 characteristics 351–5
regulations 416 classifying 350–1
relationship marketing 34 heterogeneity of 353–4
relative competitive strength 107 inseparability of 352–3
repertoire buying 256 intangibility of 351–2
repositioning nature of 349–51
of brands 183–6 ownership 355
and innovation 203 perishability of 354
research and development 213 service product 164
reseller mark-ups, controlling 241–5 service quality 355–7
resource allocation 106–13 determinants 356, 357
in business unit system 118 performance 356–7
strategy 17–18 service segment 72
resource objectives 104 service tasks 355–61
response process 252–3 contact activities 358–9
retrenchment in environment change 96 differentiation 360–1
return on assets (ROA) 387, 388 productivity 358
return on capital employed (ROCE) 387 quality 355–7
return on equity (ROE) 387 staff, managing 359–60
return on investment (ROI) 4, 386 services drivers 80
return on sales (ROS) 386, 388, 391 services marketing strategy 361–76
communications 364
salary of salesforce 305–6 differential advantage 362
sales management 301–7 distribution 365–6
compensation 305–6 marketing mix 363–4
evaluating performance 306–7 in non-business sector 368
motivating 302, 303–4 operating strategy 362–3
priorities 301 within organisation 366–8
recruitment 301–2 target market segmentation 362
445
9736 MMST_Z02.QXD 12/5/05 2:59 PM Page 446
Subject index
shareholder objectives 11–12 target markets 37

shareholder value 6–7 in advertising 270
and advertising 269 cost drivers 81–2
shift in trust in environment change 96 defining 400
short-term improvements 380–2 differential advantage 78–84
short-term profitability 5 and pricing 232
skimming pricing 230 segments, choosing 74–6, 88
solutions, new 196 utility drivers 79–81
source of communications 253 value chain 82–4
stage-gate system 211 targeting strategies 74–8
stakeholders technological change 415
and brands 180 telemarketing 272
and corporate mission 103 territory, salesforce allocation to 300
in non-business sector 369 three-level channel 323
objectives 10–11 tolerance zone 10
stars 108 trade promotions 276–7
strategic business units transaction 34
defining 105–6 transformation programme 397–407
strategic control 101 transformational change 385
strategic decisions on turnaround 388 turnaround management
strategic drift 383 consolidation phase 388–97
financial concepts 385–8
strategic focus 118–19
headquarters, role of 404–5
strategic intent 22–3, 413
industrial change 382–5
strategic market management 99
objectives 386–8
strategic market planning
separation of businesses 404
business unit strategy 117–27
short- vs long-term 380–2
change, adapting to 94–8
transformation programme 397–407
corporate strategy 101–17
types of change 382–5
systems, evolution of 98–101
two-level channel 323
strategic objectives 118
strategic success criteria 20–2
umbrella branding 181–2
efficiency vs effectiveness 21
undifferentiated marketing 74–5
market fit 20
unique positioning concept 175
oporational effectiveness 22
utility drivers 79–81
speed and decisiveness 21
timing 20–1
value-based planning models 112–13
strategic windows 94–5 value chain 82–4, 321
strategies value ladder 292–3
developing 17–19 values 251
hierarchy of 17 variable costs in turnaround 391–2
substitutes, market dynamics of 139–40 vertical branding 181
success, and customer satisfaction 40–2 vertical scope 103
successful brands 165 vision
superordinate goals 332 and innovation 207
support activities 83 and transformational change 398, 400, 406
sustainable competitive advantage 19 Vorstand 14
sustainable differential advantage 78
sustaining technologies 205 wants 32
switching costs 222 weighted number of exposures 270
SWOT analysis 87, 124 wheel-of-retailing hypothesis 334
synergies
exploiting 113–14 zero change 383
and innovation 201 zero-level channel 323
446

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0273693980_COVER 30/11/05 5:10 pm Page 1

Marketing Management and Strategy

Doyle and Stern

We work with leading authors to develop the strongest

Under a range of well-known imprints, including

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Peter Doyle and Philip Stern

Pearson Education Limited

and Associated Companies throughout the world

Visit us on the World Wide Web at:

First published under the Prentice Hall imprint 1994

© Pearson Education Limited 1998, 2002, 2006

British Library Cataloguing-in-Publication Data

Library of Congress Cataloging-in-Publication Data

Typeset in 9/13pt Stone Serif by 30.

The publisher’s policy is to use paper manufactured from sustainable forests.

Preface vii Summary 91

Chapter 7 Questions 318

Confusion: marketing vs. selling

Aims of this book

■ Draw on multiple disciplines. Successful marketing requires managers to draw on

New to the Fourth Edition

American Home Products Electrolux Price Waterhouse

About the authors

Philip Stern is Senior Lecturer in Marketing and Strategic Management at Warwick

We are grateful to the following for permission to reproduce copyright material:

‘When the rate of change

Chapter 1 MANAGEMENT: OBJECTIVES AND TASKS

Chapter 1 Management: objectives and tasks

Objectives and success

Objectives and success

Table 1.1 The world’s largest companies, 2004

1 2 General Electric US 299 Diversified industrial 134 30 20

Source: Financial Times, 21 May 2004

Chapter 1 Management: objectives and tasks

Box 1.1 The importance of profits

Objectives and success

Box 1.2 Long-term growth versus short-term profitability:

Chapter 1 Management: objectives and tasks

pursue it prove to be very short-lived phenomena. In fact a computer model used to

Objectives and success

Box 1.3 Hewlett-Packard FT

Chapter 1 Management: objectives and tasks

Objectives and success

Financial Financial Marketing Buyer Marketing

Margins Price Target

Financial Turnover Distribution Service

Turnover Advertising Information

Figure 1.1 Strategy

Chapter 1 Management: objectives and tasks

Stakeholders’ objectives and constraints

Stakeholders’ objectives and constraints

Chapter 1 Management: objectives and tasks

Figure 1.3 Market share

Stakeholders’ objectives and constraints

zone of tolerance is evidenced in the premiums that executives normally obtain

Chapter 1 Management: objectives and tasks

Developing balanced objectives

Broadening the span of objectives means recognising that ‘excellence’ is unlikely to

Balanced organisational representation

Developing balanced objectives

Defining the organisation’s mission

consistent and higher returns